ACCT 2302 | Chapter 11

True or false: Depreciation of existing assets is relevant to decisions.

False Reason: Depreciation spreads sunk costs across the life of the assets and is not relevant.

True or false: Some decisions only have one alternative.

False Reason: Every decision involves choosing from at least two alternatives, even if the alternatives are yes or no.

When a product is past the split-off point, but is not yet a finished product, it is called a(n) _______ product.

intermediate

Future costs and benefits that do not differ between alternatives are ______ costs to the decision-making process.

irrelevant

Two or more products that are produced from a common input are known as _______ products.

joint

Two or more products produced from a common input are called ______ ______.

joint products

The potential benefit given up when selecting one alternative over another is a(n) ______ cost.

opportunity

The costs provided by a well-designed activity-based costing system are ______ relevant to a decision.

potentially

Costs that have already been incurred and can not be changed by decisions made in the current period or in future periods are called _______ costs.

sunk

True or false: Mingling irrelevant and relevant costs may cause confusion and distract attention from critical information.

true

True or false: Opportunity costs are not found in accounting records because they are not relevant to decisions.

False Reason: Opportunity costs are not found in accounting records because they are not cash outlays. Opportunity costs are relevant to decisions.

When planning a trip and deciding whether to drive or fly, the ______ is a sunk cost and should be ignored. a. monthly parking fee that must be paid at your apartment while you are gone b. cost of car repairs and maintenance c. original cost of the car d. cost of gasoline for the trip

c. original cost of the car Reason: The cost is not relevant because it will still have to be paid. However, it is a future cost, not a sunk one. Reason: Repairs and maintenance change based on miles driven. Reason: A sunk cost is a cost that has already been incurred and cannot be avoided. Gasoline is a future cost.

Synonyms for differential costs include ______ cost. a. avoidable b. irrelevant c. incremental d. sunk

a, c

When making a decision only ______ costs and benefits should to be included in the analysis. a. relevant b. unavoidable c. opportunity d. irrelevant

a. relevant

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

b

If a cost is traced to a segment using activity-based costing, it ______ an avoidable cost of the segment. a. is never b. is always c. may or may not be

c

When a resource, such as space in the factory, has no alternative use, its opportunity cost is ______. a. negative b. infinite c. zero d. not determinable

c

As it applies to sell or process further decisions, which term refers to a product that is in the process of being made? a. Opportunity cost b. Joint product c. Intermediate product d. Joint cost

c Opportunity cost Reason: 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. Joint product Reason: This is when two or more products are produced from a common input. Joint cost Reason: Joint cost is used to describe the costs incurred up to the split-off point.

Anything that prevents you from getting more of what you want is a(n) ______.

constraint

When a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a(n) _______.

constraint or bottleneck

Select all that apply Which of the following may be an advantage of making a part rather than buying it? a. Higher quality and lower cost because the supplier company enjoys economies of scale b. More dependence on suppliers c. Less dependence on outside suppliers d. A smoother flow of parts and materials for production

c,d

When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative ______.

income statements

If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is ______. a. the profit from the current use of the resource b. the profit from the best alternative use of the resource c. zero

b

Which of the following can make a product line look less profitable than it really is? a. Common variable costs b. Allocated common fixed costs

b

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

special

A one-time sale that is not considered part of the company's normal ongoing business is referred to as a(n) _______ _______ decision.

special order

When considering decision alternatives, both relevant and irrelevant costs are included when using the _______ _______ approach.

total cost

Being less dependent on suppliers and making profits on both parts and the final product are advantages of _______ _______.

vertical integration

When demand for products exceeds the production capacity, a(n) _______ _______ _______ decision must be made.

volume trade-off

Select all that apply Isolating relevant costs is desirable because ______. a. managers prefer to see all costs and benefits associated with a decision b. all information needed for the total cost approach is rarely available c. critical information may be overlooked with the total cost approach d. irrelevant costs may be used incorrectly in the analysis

b,c,d

Costs and benefits that always differ between alternatives are ______ costs and benefits. a. variable b. sunk c. irrelevant d. relevant

d. relevant

When making a decision, irrelevant items are included in the analysis of both alternatives when using ______. a. he differential cost approach only b. both the differential and total cost approaches c. neither the differential nor total cost approach d. the total cost approach only

d. the total cost apporach

Determining whether to carry out an activity in the value chain internally or use a supplier is a ______ decision. a. special order b. product line c. make or buy d. utilization of constrained resource

c

Differential revenue is an example of a(n) ______ benefit.

relevant

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is as follows: Cost Per Unit Total Variable manufacturing cost $12 $240,000 Supervisor salary $3 $60,000 Depreciation $1 $20,000 Allocated fixed overhead $7 $140,000 If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should ______. a. continue to make the part — $40,000 advantage b. buy the part — $80,000 advantage c. continue to make the part — $60,000 advantage d. buy the part — $100,000 advantage

c Reason: The avoidable costs of making the product are the variable costs plus the supervisor salary or $15 per unit. The total savings is $60,000 ($18 buy price - $12 variable cost - $3 supervisor salary = $3 advantage to make X 20,000 units).

Select all that apply A company must make a volume trade-off decision when they ______. a. have excess capacity that is not currently being utilized b. do not have enough capacity to satisfy the demand for all of its products c. must trade off units of one product for units of another due to limited production capacity

b,c

Select all that apply A company is considering buying a component part that they currently make. Items related to the equipment being used to make the component that are relevant to this decision include ______. a. annual depreciation charges b. salvage value c. original cost d. alternative uses for the equipment

b,d

A decision to carry out one of the activities in the value chain internally, rather than to purchase externally from a supplier, is called a(n) _______ or _______ decision.

make/buy

Effectively managing an organization's constraints is a key to increased ______.

profits

When a constraint exists, companies need to focus on maximizing ______. a. contribution margin per unit of constraint b. net sales c. net income from sales d. contribution margin per unit

a

When there is a constrained resource, the best way to increase profits is to ______. a. increase the capacity of the bottleneck b. keep the capacity of the bottleneck the same c. decrease the capacity of the bottleneck

a

Irrelevant costs include ______. a. future costs that do not differ between alternatives b. future costs that differ between alternatives c. sunk costs d. all fixed costs

a, c

Select all that apply Potential advantages of dropping a product line or other segment include ______. a. an overall decrease in other product line sales b. increasing relevant costs that the company incurs c. an overall increase in net operating income d. avoiding more fixed costs than the company loses in contribution margin

c,d

The first step in decision making is to ______.

define the alternatives

One of the great dangers in allocating common _______ costs is that such allocations can make a product line look less profitable than it really is.

fixed

When making a volume-trade off decision, managers should ignore ______.

fixed costs

What type of cost is never relevant and should be disregarded when making decisions?

sunk Opportunity Reason: Opportunity costs should always be considered in decision making. Marginal Reason: Marginal cost is the cost of producing one more unit of product. Any additional cost from producing another unit is a relevant cost. Incremental Reason: Incremental costs are the same as differential costs; they are the difference in cost between two alternatives. Any cost that changes is relevant to decision making.