CH 11 Pre-Work Terms

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

(special or specialty) order

Being less dependent on suppliers and realizing profits from the parts and materials that it is "making" rather than "buying," as well as profits from its regular operations, are advantages of ______ ______.

(vertical or vertically) (integration or integrated)

Which of the following can make a product line look less profitable than it really is?

Allocated common fixed costs

Opportunity costs are not found in accounting records because they are not relevant to decisions.

False

True or false: The accounting depreciation of an existing asset is relevant to decisions.

False

As it applies to sell or process further decisions, which term refers to a product that is in the process of being made?

Intermediate product

Which of the following may be an advantage of making a part rather than buying it?

Less dependence on outside suppliers A smoother flow of parts and materials for production

Which of the following involves increasing the capacity of a bottleneck?

Relaxing the constraint

In the context of decision making, every decision involves choosing from among at least two alternatives.

True

True or false: Effectively managing an organization's constraints is a key to increased profits.

True

A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n) ______ cost.

avoidable

Potential advantages of dropping a product line or other segment include ______.

avoiding more fixed costs than the company loses in contribution margin an overall increase in net operating income

A limited resource of some type that restricts the company's ability to satisfy demand 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

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: Variable manufacturing cost: $12 per unit; $240,000 total Supervisor salary: $3 per unit; $60,000 total Depreciation: $1 per unit; $20,000 total Allocated fixed overhead: $7 per unit; $140,000 total 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 _____.

continue to make the part — $60,000 advantage Explanation: Depreciation is not a relevant cost. 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 × 20,000 units).

A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in ______.

contribution margin

If some products must be cut back because of a constraint, produce the products with the highest ______.

contribution margin per unit of constrained resource

When a constraint exists, companies need to focus on maximizing ______.

contribution margin per unit of constraint

Isolating relevant costs is desirable because ______.

critical information may be overlooked with the total cost approach all information needed for the total cost approach is rarely available irrelevant costs may be used incorrectly in the analysis

The first step in decision making is to ______.

define the alternatives

A future cost that is not the same between any two alternatives is known as a(n) ______, incremental, or avoidable cost.

differential

A company must make a volume trade-off decision when they _____.

do not have enough capacity to satisfy the demand for all of its products must trade off units of one product for units of another due to limited production capacity

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

Irrelevant costs include ______.

future costs that do not differ between alternatives sunk costs

To maximize total contribution margin when a constrained resource exists, produce the products with the ______.

highest contribution margin per unit of the constrained resource

When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative ______ ______ showing the effects of either keeping or dropping the product line.

income statement(s)

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

income statements

When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of a(n) ______ cost.

incremental avoidable

An increase in cost between two alternatives is a(n) ______ cost.

incremental/ differential/ relevant

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

intermediate

Costs and benefits that should be ignored when making decisions are called ______ costs and benefits.

irrelevant

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

irrelevant

When deciding whether to drive your car or take a train to a destination, the costs for your car insurance and driver's license are ______ costs.

irrelevant

In order to prevent confusion and keep attention focused on critical information, it is desirable to ______.

isolate relevant costs from irrelevant costs

Costs incurred up to the split-off point in a process in which two or more products are produced from a common input are called ______ costs.

joint

The costs incurred up to the split-off point in a process in which two or more products are produced from a common input are known as _____ costs.

joint

The split-off point is the point in the manufacturing process at which the ______ products can be recognized as separate products.

joint

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

joint

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

A decision to carry out one of the activities in the value chain internally rather than to purchase externally from a supplier is a ______ decision.

make or buy

Determining whether to carry out an activity in the value chain internally or use a supplier is a ______ decision.

make or buy

If a cost is traced to a segment using activity-based costing, it ______ an avoidable cost of the segment.

opportunity

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

opportunity

Space being used that would otherwise be idle has a(n) ______ cost of zero.

opportunity/ relevant

When planning a road trip, the ______ is a sunk cost and should be ignored.

original cost of the car

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

potentially

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

profits

When a manager increases the capacity of the bottleneck, it is called ______ or elevating the constraint.

relaxing

When making a decision, only ______ costs and benefits should be included in the analysis.

relevant

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.

relevant

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 ______.

salvage value alternative uses for the equipment

Deciding what to do with a joint product at the split-off point is a ______ decision.

sell or process further

Deciding what to do with a joint product at the split-off point is a(n) ______ or ______ ______ decision.

sell or process further

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

special

The point in the manufacturing process at which joint products can be recognized as separate products is called the ______ point.

split-off

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

sunk

Costs that have already been incurred and cannot be avoided regardless of what a manager decides to do are ______ costs.

sunk

If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is ______.

the profit from the best alternative use of the resource

When making a decision, irrelevant items are included in the analysis of both alternatives when using _____.

the total cost approach only

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

total

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

volume trade-off