accounting ch 7

Continue-or-discontinue decisions are commonly known as _____-or-_____ decisions.

keep or drop

Opportunity Cost : Opportunity Cost Is defined as:

the value forgone due to decision of keeping a product and dropping another, Hence the benefit foregone due to dropping of a product is relevant in decision making, Hence opportunity cost is relevant cost in decision making

When deciding whether to eliminate a business division, managers must/should

1. focus on the segment margin generated by the division and the quantitative effects revealed by incremental analysis. 2. consider qualitative factors, such as the effect that eliminating a segment might have on the demand for the company's other products.

When making decisions, managers should ignore ____ costs.

Irrelevant, sunk, or unavoidable

costs have already been incurred and cannot be avoided regardless of what a manager decides to do are called what?

Sunk

True or false: Incremental analysis is a decision-making approach that compares the relevant costs and benefits of decision alternatives.

True

True or false: Qualitative factors should be considered in special-order decisions.

True

Which of the following phrases best defines a production bottleneck?

a. A constrained resource

When evaluating a make-or-buy decision, managers should consider ______. Multiple select question. a. all fixed production costs b. opportunity costs c. all variable production costs d. qualitative factors

b. opportunity costs c. all variable production costs d. qualitative factors

1. When planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a(n) ____cost. Multiple choice question. a. sunk b. relevant c. opportunity d. irrelevant

b. relevant

Costs and benefits that differ between alternatives are called ______ costs and benefits. Multiple choice question. a. irrelevant b. relevant c. sunk d. variable

b. relevant

You are planning a trip and deciding whether to drive your car or take the train. The cost of gasoline is a(n) ______ cost. Multiple choice question. a. irrelevant b. relevant c. sunk

b. relevant

Sales revenue minus all fixed and variable costs attributable to a particular division is called ______. a. gross margin b. segment margin c. contribution margin d. segment operating income

b. segment margin

If a company has a resource that could be used for something else, the ____ cost is the profit that could be derived from the best alternative use of the resource.

opportunity

Costs and benefits are relevant only when

they occur in the future, not the past, and when they differ between alternatives.

1. Incremental analysis ______. Multiple select question. a. is an important component of identifying decision problems b. is also called differential analysis c. considers all costs and benefits of a decision d. may be referred to as relevant costing

b. is also called differential analysis d. may be referred to as relevant costing

TRUE or FALSE Relevant costs are only costs that differ as a result of a decision.

TRUE

TRUE or FALSE With incremental analysis you isolate the information that is relevant to the decision.

TRUE

TRUE or FALSE Variable costs may or may not differ between alternatives.

TRUE

True or false: An important consideration in a keep-or-drop decision is the impact on the costs and revenues of other segments.

TRUE Reason: The elimination of a segment may impact sales of other segments.

TRUE or FALSE Sunk costs are never relevant to decisions

TRUE they are something that has already occurred in the past. irrelevant.

Deciding to carry out an activity internally or buy externally from a supplier is called a ______ decision. a. sell-or-process-further b. make-or-buy c. product-line d. special-order

b. make-or-buy

A fixed cost that can be traced to a specific business segment is called a(n) ___ fixed cost.

direct or relevant

When a company has more than enough resources to satisfy demand it is operating with ___ capacity.

excess or idle

Relevant costs have to do two things:

1. Occur in the future 2. Differ between decision alternatives

what are Sunk cost?

Cost that has occurred in the past

____ ____ are costs that differ between choices.

Differential costs

Flexcore Inc. received a special order from one of its customers to sell its product for a price less than the normal selling price. If Flexcore does have idle production capacity necessary to fill this order, which of the following costs is likely to be irrelevant to the decision? a. Fixed manufacturing overhead b. Direct materials c. Variable manufacturing overhead d. Direct labor

Fixed manufacturing overhead

Relevant costs

Have the potential to influence a specific decision

Jay's Furniture makes couches and love seats. Last year the total contribution margin was $900,000 for couches and $350,000 for love seats. Love seats had a segment margin of $50,000 and common fixed costs of $100,000, so the company is considering stopping love seat production. If that happens, sales of couches are expected to increase by 10%, The net impact of stopping production of love seats will (increase/decrease) ____ profits by $____.

a. increase b. $40,000

When considering whether or not to take a trip, the ______ is irrelevant to the decision. a. original cost of the car b. cost of gasoline for the car c. tolls that will be paid during the drive to the destination

a. original cost of the car

Given the following, determine if a buy price of $4.00 per unit for 3,000 units should be accepted. Total variable production costs of making the units equal $11,100, and total production fixed costs are $3,500. Of the fixed costs, $1,500 is avoidable if the units are purchased. Based on price, the company should (make/buy) _____ the units at a total net benefit of $______.

Blank 1: buy Blank 2: 600

Opportunity costs become relevant when a company is operating at ___ ___ .

Blank 1: full, maximum, or max Blank 2: capacity

Deciding to accept a sales request that is outside the scope of normal sales is called a(n) _____ - ____ decision.

Blank 1: special or specialty Blank 2: order

A major accounting contribution to the managerial decision-making process in evaluating possible courses of action is to

Provide relevant revenue and cost data about each course of action.

____ ____ are costs that differ between alternatives.

Relevant costs

Research and development Costs:

SUNK costs/ Dead Cost , they are already incurred before decision is being made and cant be evaded by selecting a product and dropping another, hence these are irrelevant costs.

Deciding what to do with a product that is salable or could be enhanced is a ______ decision. a. qualitative analysis b. special-order c. product-line d. sell-or-process-further e. make-or-buy

d. sell-or-process-further

Fruit First produces and sells baskets of dried fruit for $20 each. It receives a special order from Carol Costellano for 150 baskets at a special price of $16. The company incurs a variable cost of $11 and a fixed manufacturing overhead of $6 per unit of fruit basket. The company has excess capacity to fill this special order. Should the special order be accepted?

yes

Fruit First produces and sells baskets of dried fruit for $20 each. It receives a special order from Carol Costellano for 150 fruit baskets at a special price of $16. The company incurs a variable cost of $11 and a fixed manufacturing overhead of $6 per unit of fruit basket. The company is operating at full capacity and will have to cancel its existing orders to fill this special order. What will be the total opportunity cost that must be considered in the incremental analysis for this decision?

$1,350

the five-step decision-making process

1. identify the decision problem, 2. determine the decision alternatives, 3. evaluate the costs and benefits of the alternatives, 4. make the final decision, 5. review the results of the decision.

Jay's Furniture makes couches and love seats. Last year the total contribution margin was $900,000 for couches and $350,000 for love seats. Love seats had a segment margin of $50,000 and common fixed costs of $100,000, so the company is considering stopping love seat production. If that happens, sales of couches are expected to increase by 10%, The net impact of stopping production of love seats will (increase/decrease) ____ profits by $____.

Blank 1: increase Blank 2: 40,000 or 40000

TRUE or FALSE When managers make a decision, they base it strictly on the numerical analysis performed in step three of the decision making process.

a. FALSE b. Managers base decisions on the numerical analysis and a variety of other factors.

The most constrained resource in called the ____.

bottleneck

TRUE or FALSE Irrelevant costs impact decisions.

FALSE Irrelevant costs do not impact decisions.

The __________ of making something internally include alternative uses for the internal resources.

Opportunity costs

Which of the following is the decision rule of a sell-or-process-further decision? multiple choice a. A product should be processed further if the incremental revenue from processing it further exceeds the incremental cost b. A product should be processed further if the total revenue from processing it further exceeds the total manufacturing cost c. A product should be processed further if there is an increase in revenue from processing it further d. A product should be processed further if the total cost of processing it further exceeds the incremental revenue

a. A product should be processed further if the incremental revenue from processing it further exceeds the incremental cost Correct

Which of the following statements are true? Multiple select question. a. Direct fixed costs are avoidable if a segment is eliminated. b. Direct fixed costs can include fixed machinery costs. c. Advertising for a specific product line is a direct fixed cost. d. The general manager of a factory that has three separate product lines is a direct fixed cost.

a. Direct fixed costs are avoidable if a segment is eliminated. b. Direct fixed costs can include fixed machinery costs. c. Advertising for a specific product line is a direct fixed cost.

TRUE or FALSE An avoidable cost is one that has already been spent.

a. FALSE b. An avoidable cost is one a manager can avoid by choosing one alternative instead of another. A sunk cost is one that has already been spent.

TRUE or FALSE A special-order decision analysis should not be used if the firm is operating at full capacity.

a. FALSE b. If the firm is operating at full capacity, the analysis could be used, but it must consider opportunity costs.

Which of the following statements are true? Multiple select question. a. Hiring more workers or leasing additional machines are long-term strategies for managing constrained resources. b. Increasing the capacity of the constraint is the best way to manage constrained resources in the short run. c. Eliminating non-value-added activities can help companies manage constrained resources. d. Strategies to manage constrained resources in the long term will always save costs.

a. Hiring more workers or leasing additional machines are long-term strategies for managing constrained resources. c. Eliminating non-value-added activities can help companies manage constrained resources.

Which of the following is NOT a question managers need to consider when making a keep-or-drop decision? a. How much is the salary of the company CEO? b. Will other segments or product lines be affected? c. How much will total revenues and costs change if the segment is eliminated? d. Are there other qualitative factors to consider? e. Are there opportunity costs associated with keeping the segment?

a. How much is the salary of the company CEO?

DeLightful, Inc. manufactures and sells electric lamps. The company currently produces all parts in its Oregon factory. One of its vendors has offered to do the packaging for a price of $2 per unit. DeLightful's management is now deciding whether to continue to package the product or hire the vendor to do it. What type of decision is the management making? a. Insourcing versus outsourcing decision b. Special-order decision c. Keep-or-drop decision d. Sell-or-process further decision e. Continue-or-discontinue decision

a. Insourcing versus outsourcing decision

Which of the following factors should be considered when deciding whether to keep a product line or drop it? (Select all that apply) Check All That Apply a. Opportunity costs of using the production facility currently being used for the product line b. Revenues generated by the product line c. Variable costs incurred in manufacturing the product d. Direct fixed costs associated with the product line e. Common fixed costs allocated to the product line f. Research and development costs spent on designing the product line

a. Opportunity costs of using the production facility currently being used for the product line b. Revenues generated by the product line c. Variable costs incurred in manufacturing the product d. Direct fixed costs associated with the product line

A sell-or-process further decision involves deciding whether to:

a. Sell a product as is or continue to refine it

TRUE or FALSE Opportunity costs are not relevant when a company has idle capacity.

a. TRUE b. If a company has idle capacity, it does not have to give up the opportunity to do something else.

TRUE or FALSE A special-order decision analysis should not be used to make long-term pricing decisions.

a. TRUE b. Prices must cover all costs if the company is to be profitable in the long run, and all costs are not considered in a special-order decision analysis.

TRUE or FALSE A sunk cost is never a relevant cost.

a. TRUE b. Sunk costs cannot change depending on the alternative and they have occurred in the past, so they are never relevant.

1. Which of the following should be ignored when deciding whether to sell a product as is or process it further? a. The cost incurred in producing the product so far b. The cost of processing products further c. The revenue from processing products further d. The opportunity cost of resources needed to process products further

a. The cost incurred in producing the product so far

Pinnacle, Inc. produces various computer parts. It produces a mouse model called AnyTouch. Pinnacle has always manufactured all parts internally, but is now considering buying the sensor for this mouse from an external supplier, SenseMore, Inc. It costs Pinnacle $10 ($7 variable and $3 fixed costs) to produce the sensor in-house. SenseMore is offering to sell the sensor at $9. Pinnacle can avoid all of its variable costs but none of its fixed costs by choosing to outsource. If Pinnacle decides to outsource, it can use its production facility to produce other parts. Which of the following are the relevant factors in this decision? a. Variable costs of producing the sensors b. Fixed costs of producing the sensors c. Revenues generated by selling AnyTouch d. Cost of equipment used to manufacture the sensors

a. Variable costs of producing the sensors

Relevant costs ______. Multiple select question. a. are also called differential costs b. are also called sunk costs c. include all costs involved in a decision d. occur in the future e. differ between alternatives

a. are also called differential costs d. occur in the future e. differ between alternatives

A(n) ______ limits a system's overall output. a. bottleneck b. contribution margin per unit of the constrained resource c. opportunity cost d. irrelevant cost

a. bottleneck

A business segment should only be dropped if a company can save more in fixed costs than it gives up in ______. a. contribution margin b. net income c. segment sales d. variable costs

a. contribution margin

When the total amount of the cost will be the same regardless of the alternatives selected in a decision, the cost should be ______ when doing decision analysis. a. excluded b. included

a. excluded

Identifying the decision problem is the ______ step in the decision-making process. a. first b. third c. final d. second

a. first

Incremental analysis is done when?

after the problem has been identified and alternatives have been determined.

___ ___ is a cost that can be eliminated in whole or in part by choosing one alternative over another.

avoidable cost

Which of the following is a limitation of some type that restricts a company's ability to satisfy demand? a. Opportunity cost b. Constrained resource c. Special order

b. Constrained resource

When deciding whether to sell a product as is or continue to process it, costs incurred to get the product to its current condition ______ relevant to the decision. a. are b. are not c. may be

b. are not

Advantages of dropping a division or other segment include ______. Multiple select question. a. increasing relevant costs that the company incurs b. avoiding more direct fixed costs than the amount of lost contribution margin c. an overall increase in net operating income d. an overall decrease in other product line sales

b. avoiding more direct fixed costs than the amount of lost contribution margin c. an overall increase in net operating income

An analysis of a special order ______. Multiple select a. uses the same decision-making process as long-term pricing decisions b. should consider the impact on regular customers c. should consider if excess capacity exists

b. should consider the impact on regular customers c. should consider if excess capacity exists

Goodstone Tire Corporation sells tires for $90 each. Per-unit costs associated with producing and selling the tires are: Direct materials $35; Direct labor $10; Factory overhead $20. The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 1,000 tires for $65 each. Assuming that Goodstone has excess capacity, ______. a. the incremental loss from the special order will be $25,000 b. the incremental profit from the special order will be $12,000 c. there will be no incremental profit or loss from the special order

b. the incremental profit from the special order will be $12,000 Reason: The revenue per tire is $65 and the cost is $53 (direct materials, direct labor, variable overhead), so each tire will generate $12 in incremental profit or $12,000 total.

Common fixed costs ______. Multiple choice question. a. are included in the calculation of segment margin b. will be incurred even if a segment is eliminated c. should be included in a keep-or-drop analysis d. can be assigned to specific company segments

b. will be incurred even if a segment is eliminated

The calculation of segment margin ______. a. includes both direct and common fixed costs b. is the same as the calculation of contribution margin c. includes both variable and direct fixed costs

c. includes both variable and direct fixed costs

In the long term, companies can manage constrained resources by ______. Multiple select question. a. prioritizing products based on contribution margin b. eliminating value-added activities c. increasing capacity d. hiring more workers

c. increasing capacity d. hiring more workers

A one-time order that is not considered part of the company's normal ongoing business is called a ______ order. a. standard b. supplier c. special d. relevant

c. special

When performing a keep-or-drop decision analysis, ____ fixed costs should be excluded from the analysis.

common or irrelevant

Managers must prioritize how products are produced when faced with a(n) ___ resource.

constrained or limited

a company can use incremental analysis to maximize profits when there are:

constrained resources, or bottlenecks

A special order is a:

one-time order that is not considered part of the company's normal ongoing business.

When there is excess capacity, an analysis of a special order ______. a. isn't required because all special orders should be accepted b. includes opportunity costs c. should include a sales price that is the same as the regular selling price d. excludes fixed costs

d. excludes fixed costs

Determining decision alternatives ______. Multiple choice question. a. happens throughout the decision-making process b. is done using incremental analysis c. is an important part of the feedback portion of decision making d. is a critical step in the decision-making process

d. is a critical step in the decision-making process

The process of making a decision ______. a. starts with a determination of the decision alternatives b. should consider both relevant and irrelevant costs c. varies depending upon the decision at hand d. is basically the same for all decisions

d. is basically the same for all decisions

Opportunity costs are ______. a. never relevant b. always relevant c. only relevant when the company has excess capacity d. only relevant when capacity is limited

d. only relevant when capacity is limited

1. Costs that have already been incurred and cannot be avoided regardless of what a manager decides to do are ______ costs. Multiple choice question. a. relevant b. avoidable c. differential d. sunk

d. sunk

Once you have identified a problem, the next step is to determine the possible solutions, which are called ___ ___ .

decision alternatives

When considering a keep-or-drop decision, it is important to consider ___ ___, such as whether the elimination of the segment will free resources that could be used in another way.

opportunity costs

Opportunity costs do not represent actual dollar outlays; rather, they represent:

economic benefits that are forgone as a result of pursuing some course of action.

Comparing the costs and benefits of decision alternatives is done using _____ analysis because it focuses on the factors that will change between the decision alternatives.

incremental or differential

Comparing the relevant costs and benefits of alternative decision choices is called

incremental or differential analysis.

Costs that differ between alternatives are called ___ costs.

relevant, avoidable, differential, or incremental

A cost that has already been incurred and cannot be avoided regardless of what a manager decides to do is a(n) ____ cost.

sunk or sunken