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An investment centre manager is considering the purchase of a new machine. If purchased, the new machine would replace an existing one that is used to manufacture one of the investment centre's existing products.

The new machine would incur $800 per month additional running costs; this includes $300 per month of additional depreciation.

The new machine would save on direct labor time. This means that the fixed production overhead absorbed by the product on the basis of direct labor hours would reduce by $100 per month.

What is the total cost of the above that is relevant to the decision to purchase the machine?

Options:

$500; only the additional running costs, excluding depreciation, are relevant.

$700; all of the additional running costs and the reduction in absorbed overhead are relevant.

$400; only the reduction in absorbed overhead and the additional running costs, excluding depreciation, are relevant.

$800; all of the additional running costs are relevant, but the reduction in absorbed overhead is not relevant.

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Question 2

In order to support decision making, management accounting information categorizes costs in a variety of ways.

Responsibility accounting primarily distinguishes between costs on the basis that they are either:

Options:

sunk or opportunity costs

fixed or variable costs

controllable or uncontrollable costs

relevant or non-relevant costs

Question 3

Which of the following is a correct description of the key features of net present value?

Options:

It adjusts the relevant cash flows of a project to reflect the time value of money. The discount rate used is always the company's weighted average cost of capital.

It adjusts the relevant cash flows of a project to reflect the time value of money. The discount rate used reflects the risk of the project.

It adjusts the relevant profits of a project to reflect the time value of money. The discount rate used reflects the risk of the project.

It adjusts the relevant cash flows of a project after the deduction of depreciation charges to reflect the time value of money. The discount rate used is always the company's weighted average cost of capital.

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