Question

1. With respect to identifying relevant information for decision making, which of the following is true? a. Fixed costs are never relevant costs. b. Managers should not pay attention to bottleneck operations since they have limited capacity for producing output. c. Variable costs are always relevant costs. d. Depreciation is always a relevant cost. e. None of the above are true.

2. During January 2020, a firm has a total direct labor variance of $6,000 favorable and a direct labor efficiency variance of $2,000 unfavorable. What is the firm’s direct labor rate variance? a. $4,000 favorable. b. $4,000 unfavorable. c. $8,000 favorable. d. $8,000 unfavorable. e. None of the above.

Answer 1

1.

a. Fixed costs are never relevant costs.
Fixed costs can also be discretionary fixed costs, and in which case they are relevant costs.

b. Managers should not pay attention to bottleneck operations since they have limited capacity for producing output.
This is false, since the bottleneck needs to be addressed even at levels in which it creates problems to them. In order to avoid problems during scaling up of operations.

c. Variable costs are always relevant costs.

In general variable costs increase with production, and are relevant. However in some scenarios (like sunk contracts) , where the variable costs are not relevant.

d. Depreciation is always a relevant cost.

Depreciation is relevant only based on the tax impact, and at times can be irrelevant.

e. None of the above are true.

Hence we choose none of the above

2.

Total Direct Labor variance = $ 6000 favorable (A)

Direct labor efficiency variance = $ 2000 unfavorable (B)

direct labor rate variance = ? (C)

B +C = A

$ (2000) + C = $ 6000

C = $ 8000

Hence $ 8000 unfavorable