Management accountants are frequently asked to analyze various decision situatio

Question

Management accountants are frequently asked to analyze various decision situations including the following.

Situation 1: Alternative uses of plant space, to be considered in a make/buy decision.

Situation 2: Joint production costs incurred, to be considered in a sell-at-split versus a process-further decision.

Situation 3: Research and development costs incurred in prior months, to be considered in a product-introduction decision. 4. The cost of a special device that is necessary if a special order is accepted.

Situation 5: The cost of obsolete inventory acquired several years ago, to be considered in a keepversus-disposal decision.

The costs described in situations 2, 3, and 5 are

A. Sunk costs.

B. Differential costs.

C. Relevant costs.

D. Discretionary costs.

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Sunk costs:

A. Are substitutes for opportunity costs.

B. In and of themselves are not relevant to decision making.

C. Are fixed costs.

D. Are relevant to decision making

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Stark Rehabilitation Hospital is an inpatient institution for severely injured patients who need intense therapy to recover normal functioning. The hospital has a maximum capacity of 130 patients. The hospital employs nurses, doctors and physical therapists.

Expenses are as follows:

Medical staff:

- 1 nurse for every 20 patients, average cost $66,000 per year per nurse

- 1 doctor for every 60 patients, average cost $150,000 per year per doctor

- 1 physical therapist for every 10 patients, average cost $80,000 per year per therapist

The cost per patient per day for meals, medicine and supplies averages $60 per day per patient. Utilities cost a base amount of $2,500 per month plus an average of $200 per patient per month. Medical and exercise equipment, occupancy expense and administrative expense total $7,700,000 per year. The hospital patient census (i.e., number of patients at any one time) varies from a minimum of 100 patients to fully occupied at 130 patients. Stark charges $300 per day per patient, and this includes the room, meals, medicine, supplies and all services. What are Stark's variable costs?

A. Medical staff

B. Medical and exercise equipment, occupancy expense and administative expense

C. Utilities

D. Meals, medicine and supplies

ENGINEERING ECONOMICS

Explanation / Answer

(1) (C)

Situations 2, 3 & 5 state that even thought he costs were incurred in past, they are to be considered in decision making, so they are relevant costs.

(2) (B)

Sunk costs are past costs that cannot be recovered & are not used in decision-making purpose.

(3) (A) and (D)

These two are pure variable costs.

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