Concept of Relevant Costing 1 / 3

Specimen
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MC Question 29

The Hi Life Co (HL Co) makes sofas. It has recently received a request from a customer to provide a one-off order of sofas, in excess of normal budgeted production. The order would need to be completed within two weeks. The following cost estimate has already been prepared:
$
Direct materials:
Fabric 200 m2 at $17 per m2 3,400
Wood 50 m2 at $8·20 per m2 410
Direct labour:
Skilled 200 hours at $16 per hour 3,200
Semi-skilled 300 hours at $12 per hour 3,600
Factory overheads 500 hours at $3 per hour 1,500
Total production cost 12,110
General fixed overheads as 10% of total production cost 1,211
Total cost
13,321
A quotation now needs to be prepared on a relevant cost basis so that HL Co can offer as competitive a price as possible for the order.

Which statement correctly describes the treatment of the general fixed overheads when preparing the quotation?

A. The overheads should be excluded because they are a sunk cost
B. The overheads should be excluded because they are not incremental costs
C. The overheads should be included because they relate to production costs
D. The overheads should be included because all expenses should be recovered

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Specimen
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MC Question 30

The Hi Life Co (HL Co) makes sofas. It has recently received a request from a customer to provide a one-off order of sofas, in excess of normal budgeted production. The order would need to be completed within two weeks. The following cost estimate has already been prepared:
$
Direct materials:
Fabric 200 m2 at $17 per m2 3,400
Wood 50 m2 at $8·20 per m2 410
Direct labour:
Skilled 200 hours at $16 per hour 3,200
Semi-skilled 300 hours at $12 per hour 3,600
Factory overheads 500 hours at $3 per hour 1,500
Total production cost 12,110
General fixed overheads as 10% of total production cost 1,211
Total cost
13,321
A quotation now needs to be prepared on a relevant cost basis so that HL Co can offer as competitive a price as possible for the order.

Which of the following statements about relevant costing are true?

(1) An opportunity cost will always be a relevant cost even if it is a past cost
(2) Fixed costs are always general in nature and are therefore never relevant
(3) Committed costs are never considered to be relevant costs
(4) An opportunity cost represents the cost of the best alternative forgone
(5) Notional costs are always relevant as they make the estimate more realistic
(6) Avoidable costs would be saved if an activity did not happen and so are relevant
(7) Common costs are only relevant if the viability of the whole process is being assessed
(8) Differential costs in a make or buy decision are not considered to be relevant

A. (3), (4), (6) and (8)
B. (1), (2), (5) and (8)
C. (3), (4), (6) and (7)
D. (4), (5) and (6)

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