## Which of the following statements is true regarding variable costing?

Managers use differential analysis for make-or-buy decisions, product line decisions, and consumer decisions, as we’ve already heard. Differential analysis also provides a format for managers to use when deciding whether or not to accept customer special orders. What exactly is a special order, and how can differential analysis be used to construct one?
A special order is a one-of-a-kind order placed by a customer. As seen in the example below, differential analysis offers a format that lets managers determine whether to accept or reject special orders.
Assume Tony’s T-shirts produces uniforms for local soccer, baseball, basketball, and other sports teams. Tony, the owner, buys the shirts and has each team’s graphics printed on them. Since the graphics were produced many years ago, there are no design costs. Tony sells 1,000 shirts every month on average. The following are typical monthly financial data:
The monthly data given is for the company’s regular monthly activities. Tony was recently contacted by a representative from the local high school, who inquired about a one-time special order. The high school will be hosting a statewide track and field meet, and Tony’s T-shirts is willing to make 200 custom T-shirts for the event for \$17 per shirt. This order would not affect other revenues since there is enough unused space to accommodate it. Tony, in other words, has the manufacturing space and equipment to make more T-shirts.

## Income __________ when there is zero beginning inventory and all inventory units produced are sold.

Relevant cost is a concept used in managerial accounting to describe avoidable costs that occur only when particular business decisions are made. The definition of relevant cost is used to exclude extraneous data that could stymie decision-making. Related expense, for example, is used to decide if a business unit should be sold or kept. A sunk cost is the polar opposite of a related cost, as it has already been paid regardless of the result of the current decision.
Consider a commuter who runs up to the ticket counter to buy a ticket for a flight that departs in 25 minutes. To determine the ticket price, the airline must take into account all possible costs. Almost all of the expenses associated with having the extra passenger have already been paid, including plane fuel, airport gate fees, and the entire plane’s crew’s salary and benefits. These costs are referred to as sunk costs or irrelevant costs because they have already been incurred. The airline bases its last-minute ticket pricing decision on only a few minor costs, such as labor to pack the passenger’s luggage and any food served mid-flight.

### Under absorption costing, which of the following statements is not true?

Management should consider the following when considering a special order: Risk management may be very formal, with well-defined work processes, or very informal, with no such procedures or methods in place. Management should A. evaluate a special order before assessing it. Risk management is an innovative method that entails recognizing, assessing, and minimizing the consequences of a risk occurrence.
The amount of ability needed to complete the special order If the buyer’s bid would cover the cost of manufacturing the goods In the study, the function of fixed costs. Special order pricing is a method of determining the lowest price at which a special order should be accepted and the lowest price at which a special order can be refused. Management should consider a special order when reviewing it.
A physician’s evaluation and care of a suicidal patient are difficult tasks. The importance of assessment and quality management is emphasized. As seen in the example below, differential analysis offers a format that assists managers in deciding whether to accept or reject special orders.

### Which of the following is not a product cost under variable costing?

Businesses must constantly make short-term decisions such as whether or not to accept special order requests from customers. A special order is one that the corporation did not expect when putting together its annual budget. As a result, this is an alternative way to raise revenue beyond and above sales targets. Special orders usually request a lower price than what is commonly available and/or contain extra costs. Sometimes, students are swayed by the lower price or contribution margin and want to cancel the order right away. However, the order should be considered whether it will result in additional benefit.
Keep in mind that a special order is one that the organization did not expect. The organization must ensure that it has enough resources to fill this order without jeopardizing the year’s original plan.
A special order usually comes with a lower price and/or extra costs. Will the price be sufficient to cover the additional costs incurred by the order? Consider overhead distribution. The projected production was used to develop the overhead allocation rates at the beginning of the year. These special orders are not part of the regular production schedule. As a result, these jobs will not be subject to fixed overhead. This enables the business to produce the goods required for the special order at a lower cost. Despite the cheaper price, the business will be able to make a profit on the job.