Cost Accounting Quiz: Relevant Vs Irrelevant Costs
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Relevant Vs Irrelevant CostsQuestion 1 of 20

ChemPro Inc. produces two products, Alpha and Beta, from a joint process that costs $150,000. This process yields 10,000 gallons of Alpha and 20,000 gallons of Beta. Alpha can be sold at the split-off point for $10 per gallon. Alternatively, it can be processed further into Super-Alpha at an additional cost of $4 per gallon. Super-Alpha sells for $15 per gallon.

What is the net financial advantage or disadvantage per gallon of processing Alpha into Super-Alpha?

$1 advantage
$11 advantage
$4 disadvantage
$6 disadvantage
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Cost Accounting Quiz

Cost Accounting Quiz: Relevant Vs Irrelevant Costs

Practice Relevant Vs Irrelevant Costs in Cost Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Relevant Vs Irrelevant Costs, giving you a quick way to practice the rules, question types, and explanations that matter most for Cost Accounting.

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Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

ChemPro Inc. produces two products, Alpha and Beta, from a joint process that costs $150,000. This process yields 10,000 gallons of Alpha and 20,000 gallons of Beta. Alpha can be sold at the split-off point for $10 per gallon. Alternatively, it can be processed further into Super-Alpha at an additional cost of $4 per gallon. Super-Alpha sells for $15 per gallon.

What is the net financial advantage or disadvantage per gallon of processing Alpha into Super-Alpha?

  1. $1 advantage (correct answer)
  2. $11 advantage
  3. $4 disadvantage
  4. $6 disadvantage
Explanation: The decision to process further should be based on incremental revenues and costs after the split-off point. The joint cost of 150,000isasunkcostandirrelevanttothisdecision.Theincrementalrevenuepergallonisthedifferencebetweenthefinalsalespriceandthesplit−offsalesprice(150,000 is a sunk cost and irrelevant to this decision. The incremental revenue per gallon is the difference between the final sales price and the split-off sales price (15 - $10 = $5). The incremental cost is the further processing cost of $4 per gallon. The net financial advantage is the incremental revenue minus the incremental cost: $5 - $4 = $1 advantage per gallon.

Question 2

Veridian Dynamics operates a retail division that reported the following results last year:

Sales: $500,000 Variable Expenses: $300,000 Contribution Margin: $200,000 Fixed Expenses:

  • Direct advertising: $80,000
  • Supervisor salaries: $50,000
  • Allocated corporate overhead: $90,000 Net Operating Loss: ($20,000)

Management is considering dropping the division. If the division is dropped, all its variable costs and direct fixed costs can be avoided. The allocated corporate overhead will continue regardless of the decision.

What would be the effect on Veridian Dynamics' overall annual net operating income if the retail division is dropped?

  1. Decrease by $70,000 (correct answer)
  2. Increase by $20,000
  3. Decrease by $200,000
  4. Increase by $110,000
Explanation: To determine the effect on overall profit, we must compare the lost contribution margin to the avoidable fixed costs. The lost contribution margin is 200,000.Theavoidablefixedcostsarethedirectadvertising(200,000. The avoidable fixed costs are the direct advertising (80,000) and supervisor salaries ($50,000), totaling $130,000. The allocated corporate overhead is irrelevant as it will continue. The division's segment margin, which is its contribution to covering common corporate costs, is $200,000 (Contribution Margin) - $130,000 (Avoidable Fixed Costs) = $70,000. Dropping the division would eliminate this positive segment margin, causing overall corporate net income to decrease by $70,000.

Question 3

Stark Industries is considering replacing an old machine with a new, more efficient model. The old machine was purchased 5 years ago for $200,000 and has a current book value of $80,000. Its current market value is $50,000. The new machine costs $300,000 and is expected to generate operating cost savings of $60,000 per year for its 5-year life. Stark uses straight-line depreciation.

For the purpose of a capital budgeting analysis of the replacement decision, which of the following amounts is an irrelevant cost?

  1. The market value of the old machine, $50,000.
  2. The annual operating cost savings, $60,000.
  3. The book value of the old machine, $80,000. (correct answer)
  4. The purchase price of the new machine, $300,000.
Explanation: In an equipment replacement decision, relevant costs are future costs and revenues that differ between alternatives. The book value of the old machine (80,000)istheresultofapast(sunk)cost(80,000) is the result of a past (sunk) cost (200,000 original price) and accounting depreciation conventions. It is not a future cash flow and does not differ between the alternatives of keeping or replacing the machine, making it irrelevant. The market value ($50,000) is relevant because it's a cash inflow that occurs only if the machine is replaced. The new machine's cost and the operating savings are also relevant future cash flows that differ between alternatives.

Question 4

GigaCorp has received a special, one-time order for 5,000 units of a product. The company has sufficient idle capacity to produce these units without affecting regular sales. The cost to produce one unit for regular operations is: Direct materials, $20; Direct labor, $15; Variable manufacturing overhead, $10; Fixed manufacturing overhead, $12. The special order would require special packaging costing $3 per unit. The customer has offered a price of $52 per unit.

What is the total of the relevant costs that GigaCorp should consider when deciding whether to accept this special order?

  1. $215,000
  2. $240,000 (correct answer)
  3. $290,000
  4. $225,000
Explanation: For a special order with idle capacity, only the incremental costs are relevant. The existing fixed manufacturing overhead is irrelevant because it will be incurred regardless of the decision. The relevant costs are the incremental variable costs and any additional costs specific to the order. The relevant costs per unit are: Direct materials (20)+Directlabor(20) + Direct labor (15) + Variable manufacturing overhead (10)+Specialpackaging(10) + Special packaging (3) = $48. For 5,000 units, the total relevant cost is 5,000 units * $48/unit = $240,000.

Question 5

A company is deciding between two different machines to purchase, Machine X and Machine Y. Both machines have the same purchase price and useful life. Machine X will have annual operating costs of $50,000. Machine Y is more automated and will have annual operating costs of $35,000, but it will require an annual software licensing fee of $15,000 that is not required for Machine X. The training costs to set up either machine are identical.

When evaluating the financial difference between the two machines over their useful lives, which of the following costs is relevant?

  1. The purchase price of the machines.
  2. The training costs to set up the machines.
  3. The combined annual operating and licensing costs of Machine Y. (correct answer)
  4. The total annual operating costs for both machines combined.
Explanation: Relevant costs are future costs that differ between alternatives. The purchase price is the same for both, so it is not differential and thus irrelevant to choosing between them. The training costs are also identical and therefore irrelevant. The total annual operating costs for both machines combined is not a useful figure for comparison. The only costs that differ are the annual operating and licensing fees. The total annual cost for Machine Y ($35,000 + $15,000 = 50,000)isakeycomponentofthedifferentialanalysis,asitcanbedirectlycomparedtoMachineX′sannualcost(50,000) is a key component of the differential analysis, as it can be directly compared to Machine X's annual cost (50,000). In this specific case, the total annual costs are identical, meaning there is no financial difference, but the components themselves (operating vs. licensing) are the relevant figures to analyze to reach that conclusion.

Question 6

Momentum Manufacturing has been approached by a customer to fill a special order. The order is for 10,000 units at a price of $75 per unit. The company is currently operating at full capacity. To accept the special order, Momentum would have to curtail production of a regular product that sells for $90 per unit and has a contribution margin of $30 per unit. The variable cost to produce the special order units is $50 per unit. There are no other costs associated with the special order.

What is the opportunity cost that is relevant to the decision to accept the special order?

  1. The variable cost of $50 per unit for the special order.
  2. The selling price of $90 per unit for the regular product.
  3. The contribution margin of $30 per unit for the regular product. (correct answer)
  4. The incremental profit of $25 per unit for the special order.
Explanation: An opportunity cost is the potential benefit that is given up when one alternative is selected over another. Since the company is at full capacity, accepting the special order requires giving up sales of the regular product. The relevant opportunity cost is the contribution margin that would have been earned on these forgone regular sales, which is $30 per unit. This lost profit must be considered a cost of accepting the special order.

Question 7

A furniture company produces both finished and unfinished tables. Unfinished tables sell for $100 and have variable costs of $60 per unit. The company can process an unfinished table further to produce a finished table by incurring additional variable costs of $30 per unit. The company would also have to pay a 5% sales commission on the final selling price of finished tables. There are no other costs that differ between the alternatives.

What is the minimum selling price the company must charge for a finished table to make the decision to process further financially attractive?

  1. Slightly more than $130.00
  2. Slightly more than $136.50
  3. Slightly more than $137.50
  4. Slightly more than $136.84 (correct answer)
Explanation: The decision to process further is justified if the incremental revenue exceeds the incremental costs. The incremental costs are the further processing costs (30)andthesalescommission.Theopportunitycostofprocessingfurtheristheforgonerevenuefromsellingtheunfinishedtable(30) and the sales commission. The opportunity cost of processing further is the forgone revenue from selling the unfinished table (100). So, the total revenue from the finished table must cover the $100 opportunity cost, the $30 further processing cost, and the sales commission. Let P be the selling price. The equation is: P > $100 + $30 + (0.05 * P). Rearranging gives: 0.95P > $130. Solving for P: P > $130 / 0.95, which means P > $136.84.

Question 8

A company is considering a special project that requires the use of 1,000 units of raw material inventory that was purchased a year ago for $15 per unit. The current replacement cost for this material is $18 per unit. The company has no other use for this material, and if not used for this project, it would be sold as scrap for $5 per unit.

What is the relevant cost of the 1,000 units of raw material for the special project decision?

  1. $18,000
  2. $15,000
  3. $13,000
  4. $5,000 (correct answer)
Explanation: The relevant cost of using an existing inventory item is its opportunity cost. The historical cost (15perunit)isasunkcostandirrelevant.Thereplacementcost(15 per unit) is a sunk cost and irrelevant. The replacement cost (18 per unit) is only relevant if the company needs to replace the inventory. Since the company has no other use for the material, using it for the project means the company forgoes the opportunity to sell it as scrap. Therefore, the relevant cost is the revenue that would be generated from scrapping it: 1,000 units * $5/unit = $5,000.

Question 9

The Home Goods division of a large corporation sells a product that has been losing money. The division's manager receives an annual bonus based on the division's reported net income. Corporate headquarters allocates a significant portion of its administrative costs to the Home Goods division. An analysis shows that if the division were dropped, the division's contribution margin would be lost, but its direct fixed costs would be avoided. The corporate cost allocation would be reallocated to other divisions.

From the perspective of the divisional manager, which of the following costs is most likely to be perceived as relevant to the decision to keep or drop the product line, even though it is irrelevant to the corporation as a whole?

  1. The division's contribution margin.
  2. The division's direct, avoidable fixed costs.
  3. The allocated corporate administrative costs. (correct answer)
  4. The variable costs of the product line.
Explanation: The key is the perspective of the divisional manager whose bonus is based on the division's reported net income. The divisional income statement includes the allocated corporate costs. Even though these costs are not avoidable from the corporate perspective and are therefore irrelevant to the overall company's decision, they directly impact the division's bottom line. The manager will see these costs as relevant because dropping the division would make these allocated costs 'disappear' from his or her performance report, potentially improving it from a loss to zero.

Question 10

FlexiCo is deciding whether to accept a special order for 2,000 units. The per-unit costs for its normal production of 10,000 units are: Direct materials, $10; Direct labor, $15; Variable overhead, $5; Fixed overhead, $8 (based on $80,000 total). To accept the order, the company must hire a temporary supervisor for $6,000. Regular fixed costs will not change. The customer is offering $35 per unit.

What is the change in operating income if FlexiCo accepts the special order?

  1. $10,000 increase
  2. $4,000 decrease
  3. $4,000 increase (correct answer)
  4. $12,000 decrease
Explanation: The analysis should include only incremental revenues and costs. The incremental revenue is 2,000 units * $35/unit = 70,000.Theincrementalcostsarethevariablecostsplusanyadditionalfixedcosts.Thetotalvariablecostis(70,000. The incremental costs are the variable costs plus any additional fixed costs. The total variable cost is (10 + $15 + $5) * 2,000 units = $60,000. The additional fixed cost is the supervisor's salary of $6,000. The allocated fixed overhead of $8/unit is irrelevant. Total incremental costs are $60,000 + $6,000 = $66,000. The change in operating income is the incremental revenue less the incremental costs: $70,000 - $66,000 = $4,000 increase.

Question 11

A company has 5,000 units of an obsolete product in inventory. The units were produced at a cost of $20 each. The company can sell them as-is for $8 each. Alternatively, the company can modify the units at a total cost of $15,000 and sell them for $10 each. A third option is to dispose of the units at a local landfill, which would cost the company $2,000 in total.

Which option should the company choose?

  1. Dispose, because it minimizes losses on the sunk cost.
  2. Modify and sell, because it generates the highest revenue.
  3. Sell as-is, because it provides the highest net cash inflow. (correct answer)
  4. Either sell as-is or modify, as both are preferable to disposal.
Explanation: The analysis must focus on future, differential cash flows. The $20 production cost is a sunk cost and irrelevant. Let's evaluate the net cash inflow of each relevant alternative:
  1. Sell as-is: Revenue = 5,000 units * $8/unit = $40,000. Net cash inflow = $40,000.
  2. Modify and sell: Incremental revenue = 5,000 units * $10/unit = $50,000. Incremental cost = $15,000. Net cash inflow = $50,000 - $15,000 = $35,000.
  3. Dispose: Net cash outflow = -$2,000. Comparing the outcomes, selling as-is provides the highest net cash inflow ($40,000) and is therefore the most profitable option.

Question 12

A company is considering whether to continue making a component or to buy it from an outside supplier for $15 per unit. The company's per-unit costs to make the component are: direct materials, $7; direct labor, $4; variable overhead, $2; and fixed overhead, $5. Of the fixed overhead, 30% is unavoidable regardless of the decision. The facility where the component is made has no alternative use.

What is the maximum price per unit the company should be willing to pay the outside supplier?

  1. $13.00
  2. $18.00
  3. $14.50
  4. $16.50 (correct answer)
Explanation: The maximum price the company should pay an outside supplier is equal to the total avoidable cost of making the component internally. The avoidable costs are the variable costs and the avoidable portion of the fixed costs. The total variable cost is $7 (DM) + $4 (DL) + $2 (VOH) = $13.00 per unit. If 30% of the fixed overhead is unavoidable, then the remaining 70% is avoidable. The avoidable fixed cost per unit is 70% * $5.00 = $3.50. Therefore, the total relevant (avoidable) cost to make the component is $13.00 + $3.50 = $16.50. The company would be better off buying only if the price is less than this amount.

Question 13

A company manufactures a product that required $200,000 in research and development costs to create. The product currently incurs $15 in variable costs per unit and is allocated $8 in fixed overhead per unit. A new manufacturing process has been developed that would reduce the variable cost to $12 per unit, but would require a one-time investment of $50,000 in equipment upgrades. The company expects to produce 20,000 units of the product over the coming year.

In deciding whether to implement the new manufacturing process, which of the following is a relevant cost?

  1. The $200,000 in research and development costs.
  2. The $8 per unit in allocated fixed overhead.
  3. The total current variable cost of $300,000 for the year.
  4. The $3 per unit difference in variable costs. (correct answer)
Explanation: Relevant costs and revenues must (1) occur in the future and (2) differ between alternatives. The R&D cost is a sunk cost and irrelevant. The allocated fixed overhead is presumed to be the same under both alternatives and is therefore irrelevant. While the total current variable cost of $300,000 (20,000 units * $15) is a future cost, the key to the decision is the difference between the alternatives. The relevant cost saving is the 3differenceperunit(3 difference per unit (15 - $12), which would be compared against the $50,000 investment. The per-unit difference is the fundamental relevant data point.

Question 14

Crestline Corp. produces a single product. The company has the capacity to produce 200,000 units per year. Currently, it is producing and selling 160,000 units at a price of $50 per unit. A customer has offered to buy 50,000 units at a price of $35 per unit. The company's variable cost per unit is $25, and its total fixed costs are $2,000,000. To accept this order, Crestline would have to forgo sales of 10,000 units to its regular customers.

What is the minimum total contribution margin Crestline must receive from the special order to be financially indifferent to accepting it?

  1. $250,000 (correct answer)
  2. $500,000
  3. $750,000
  4. $1,750,000
Explanation: To be financially indifferent, the contribution margin from the special order must cover the opportunity cost of the displaced regular sales. The company has idle capacity for the first 40,000 units (200,000 capacity - 160,000 current sales). The remaining 10,000 units of the special order would displace regular sales. The opportunity cost is the contribution margin lost from these 10,000 regular units. The contribution margin per regular unit is $50 (price) - $25 (variable cost) = $25. The total opportunity cost is 10,000 units * $25/unit = $250,000. This is the minimum additional profit the special order must generate.

Question 15

Precision Parts Inc. manufactures a component at a variable cost of $30 per unit. Annual fixed manufacturing costs related to the component's production facility amount to $150,000, of which $90,000 is depreciation and the rest is cash expenses. A third-party supplier has offered to sell the component to Precision Parts for $34 per unit. If the company outsources, it can rent the facility to another company for $50,000 per year. The company requires 20,000 components annually.

For the make-or-buy decision, what is the net financial advantage or disadvantage of buying the component from the supplier?

  1. $20,000 advantage
  2. $30,000 advantage (correct answer)
  3. $10,000 disadvantage
  4. $70,000 disadvantage
Explanation: To solve this, we compare the total relevant costs of making versus buying. Relevant Costs to Make: Variable cost (30∗20,000units)+Avoidablefixedcashexpenses(30 * 20,000 units) + Avoidable fixed cash expenses (150,000 total fixed - $90,000 depreciation = $60,000) = $600,000 + $60,000 = $660,000. Relevant Costs to Buy: Purchase price (34∗20,000units)−Rentalincome(opportunitybenefit)(34 * 20,000 units) - Rental income (opportunity benefit) (50,000) = $680,000 - $50,000 = $630,000. Depreciation is a sunk cost and irrelevant. The net financial advantage of buying is the difference between the cost to make and the net cost to buy: $660,000 - $630,000 = $30,000 advantage.

Question 16

A company is considering dropping a product. Dropping the product will eliminate its entire $100,000 contribution margin. The product has $60,000 in direct fixed costs that can be avoided if it's dropped. Additionally, this product is a 'loss leader' that boosts the sales of another, more profitable product. It is estimated that dropping the first product will cause the contribution margin of the second product to decrease by $50,000.

What will be the total impact on the company's overall profit if the product is dropped?

  1. A decrease of $10,000.
  2. A decrease of $90,000. (correct answer)
  3. An increase of $40,000.
  4. A decrease of $150,000.
Explanation: This decision involves comparing the costs saved to the contribution margin lost. The costs saved are the avoidable direct fixed costs of 60,000.Thecontributionmarginlosthastwocomponents:thedirectCMfromtheproductitself(60,000. The contribution margin lost has two components: the direct CM from the product itself (100,000) and the lost CM from the complementary product ($50,000), for a total CM loss of $150,000. The net impact on profit is the costs saved minus the CM lost: $60,000 - 150,000=−150,000 = -90,000. Therefore, dropping the product would cause overall profit to decrease by $90,000.

Question 17

A division of a company is considering launching a new product which will be manufactured in an existing facility that is currently idle. The facility has equipment that was purchased 3 years ago for $500,000. The equipment's current book value is $350,000, and it has a current market value of $280,000. The new product is expected to require $100,000 in working capital and will incur $4 per unit in variable manufacturing costs. An allocation of $2 per unit for fixed overhead will be assigned to the product.

In evaluating the decision to launch the new product, which of the following represents a relevant opportunity cost?

  1. The book value of the equipment, $350,000.
  2. The fixed overhead allocation of $2 per unit.
  3. The market value of the equipment, $280,000. (correct answer)
  4. The original purchase price of the equipment, $500,000.
Explanation: An opportunity cost is the benefit forgone by choosing one alternative over another. By using the equipment to manufacture the new product, the company forgoes the opportunity to sell it. Therefore, the current market value of the equipment, $280,000, is a relevant opportunity cost of the project. The book value and original purchase price are sunk costs and are irrelevant. The allocated fixed overhead is also irrelevant unless it represents an incremental cash outflow, which is not indicated here; it is typically an allocation of existing costs.

Question 18

An asset was purchased for $100,000 and has a current book value of $30,000. The company is considering three options: (1) Overhaul the asset for $40,000, which would increase its remaining life and generate total future cash inflows of $120,000. (2) Sell the asset now for $25,000. (3) Continue to use the asset 'as-is' for one more year, generating a cash inflow of $18,000, after which it would have no salvage value.

In deciding among the three options, which of the following is an irrelevant piece of information?

  1. The overhaul cost of $40,000.
  2. The current selling price of $25,000.
  3. The future cash inflow of $18,000 if used 'as-is'.
  4. The current book value of $30,000. (correct answer)
Explanation: Relevant costs and revenues are those that are future-oriented and differ among the alternatives. The book value of $30,000 is based on the historical (sunk) cost of the asset and is not a future cash flow. It will not change regardless of which option is chosen, and is therefore irrelevant to the decision. The overhaul cost, current selling price, and future cash inflows are all future cash flows that differ depending on the option selected, making them relevant.

Question 19

A company is evaluating whether to drop its line of digital cameras. The company's controller has provided the following data for the camera line: Sales Revenue (1,000,000),VariableCosts(1,000,000), Variable Costs (600,000), Direct Fixed Costs - avoidable (250,000),DepreciationonEquipment(250,000), Depreciation on Equipment (50,000), and Allocated Corporate Costs ($120,000). The equipment used for the camera line has no resale value.

For the purpose of the keep-or-drop decision, what is the total of the irrelevant costs included in the provided data?

  1. $50,000
  2. $120,000
  3. $170,000 (correct answer)
  4. $420,000
Explanation: Irrelevant costs for this decision are those that will not change regardless of whether the camera line is kept or dropped. Depreciation on the equipment is a sunk cost (related to the original purchase) and is non-cash, so it is irrelevant. The equipment has no resale value, so there is no opportunity cost. The allocated corporate costs are common costs that will continue to be incurred by the company even if the camera line is dropped, so they are also irrelevant. The total irrelevant cost is the sum of these two items: $50,000 (Depreciation) + $120,000 (Allocated Costs) = $170,000.

Question 20

Aero Corp. manufactures a component, Part #303, for use in one of its main products. The manufacturing cost per unit for 10,000 units is as follows: Direct materials, $6; Direct labor, $8; Variable manufacturing overhead, $4; Fixed manufacturing overhead, $10 (total fixed overhead of $100,000). A supplier has offered to sell Aero Corp. 10,000 units of Part #303 for $21 per unit. If Aero Corp. buys the part, $70,000 of the fixed manufacturing overhead would be eliminated. The facility used to produce Part #303 has no alternative use.

What is the total relevant cost per unit for Aero Corp. to make Part #303 for the purpose of this make-or-buy decision?

  1. $18.00
  2. $25.00 (correct answer)
  3. $21.00
  4. $28.00
Explanation: Relevant costs for a make-or-buy decision are the costs that differ between the alternatives. The relevant costs to make the part are the avoidable costs. These include direct materials (6),directlabor(6), direct labor (8), variable manufacturing overhead ($4), and the avoidable portion of fixed manufacturing overhead. The avoidable fixed overhead is $70,000 for 10,000 units, which is $7 per unit. Therefore, the total relevant cost to make the part is the sum of these avoidable costs: $6 + $8 + $4 + $7 = $25 per unit.