Cost Management
Which of the following is not considered in the calculation of divisional ROI?
Earnings velocity
An inaccurate cost function with a slope coefficient that is estimated too low may MOST likely result in
initiating cost cutting measures when they are unnecessary
ROI is most appropriately used to evaluate the performance of:
investment center managers
A cost function with a lower slope coefficient than a year ago could indicate that:
new cost-cutting initiatives are beneficial
The biggest challenge in making a decentralized organization function effectively is:
obtaining goal congruence among division managers
Which of the following is considered an appropriate tool to evaluate a profit center manager?
profit variances
Variable cost
remains constant on a per unit basis as the number of units produced increases
Narendra Modi Entreprises (NME) has return on investment of 15%. A MNE division, which currently has a 13% ROI and $750,000 of residual income, is contemplating a massive new investment that will (1) reduce divisional ROI and (2) produce $120,000 of residual income. If NME strives for goal congruence, the investment:
should be acquired because it produces $120,000 of residual income for the division.
A learning curve is a function:
that measures the decline in labor-hours per unit due to workers becoming better at a job
The linear equation Y = a + bX + e is often used to express cost formulas. In this equation:
the b term represents variable cost per unit of activity.
A cost function with a lower constant than a year ago could indicate all of the following EXCEPT:
the sales commission percentage has decreased
Cost allocation is an important strategic issue for U.S. manufacturing firms with foreign subsidiaries because of:
the tax implications
The relevant range is defined as
the volume of production over which the cost assumptions hold
Last month, when 10,000 units of a product were manufactured, the cost per unit was $60. At this level of activity, variable costs are 50% of total unit costs. If 10,500 units are manufactured next month and cost behavior patterns remain unchanged the:
total cost per unit will decrease
Which of the following costs is an example of a period rather than a product cost?
wages of salesperson
Given the cost formula Y = $20,000 + $4X, at what level of activity will total cost be $40,000?
5,000 units
Which of the following statements is not correct?
A decentralized organization is one in which decisions are made by top management and then implemented by managers at lower operating levels
An R-squared value that approaches one (1.0) would indicate:
A high degree of explanatory power
Which of the following statements best describes a by-product?
A product that usually produces a small amount of revenue when compared to the main product's revenue.
If a budgeted activity base (insulating) is used as the base in cost allocation, each department's cost allocation will be predictable, and not influenced by the:
Actual usage in other departments
Which of the following performance measures is (are) used to evaluate the financial success or failure of investment centers?
All of the above measure are used except "Number of suppliers"
When the level of activity increases within the relevant range, how does each of the following change?
Average cost per unit: Decrease Total variable cost: Increase Fixed cost per unit: Decrease
For the purposes of cost accumulation, which of the following are identifiable as different individual products before the split-off point?
By- products: Yes/No Joint Products: Yes/No
Simpson Enterprises hired Home & Associates to design a new computer-aided manufacturing facility. The new facility was designed to produce 300 computers per month. The variable costs for each computer are $660 and the fixed costs total $74,700 per month. The average cost per unit, if the facility normally expects to operate at eighty-five percent of capacity, is calculated to be:
$952.94 = $660 + [$74,700/(300 x .85)]
A sound allocation system should:
-be cheap and easy to administer -provide incentives for cost control -charge in proportion to amount used or benefit received -be perceived as equitable by those who are charged
Learning curve effects can be incorporated:
-into performance evaluations -into production shcedules -when using costs to price products
The author of our textbook, Jerold Zimmerman argues that cost allocation:
-is a form of transfer pricing for indirect costs -is an internal tax on services -distorts choices that managers would make otherwise -should be imposed when marginal cost exceeds average cost of an internal resource
If machine maintenance is scheduled at a time production is at a low level, then:
-low production is the cost driver of high repairs -an understanding of operation is needed to determine an appropriate cost driver
Internal resources, such as legal dept., training dept., duplicating, telephone services, tend to be under-utilized, leading to Zimmerman's death spiral, when:
-managers may choose whether to purchase the service internally or externally -the internal pricing system seeks to recover sunk costs -managers may decide to reduce the quantity of services used -the internal pricing system utilizes full costs
Which of the following is not normally considered an advantage to decentralization?
-the managers of an organization's subunits have specialized information and skills that enable them to manage their departments most effectively -allowing managers autonomy in decision making provides managerial training for future higher-level managers -managers with some decision-making authority usually exhibit greater motivation than those who merely execute the decisions of others -delegating some decisions to lower-level managers provides time relief to upper-level managers
Place the following steps in order for estimating a cost function using quantitative analysis: A. = Plot the data B. = Estimate the cost function C. = Choose the dependent variable D. = Identify the cost driver
C D A B
The most clear and unbiased basis for cost allocation exists when which one of the following can be determined?
Cause-and-effect relationship
When considering the purchase of a large central system, such as power generation or computer networks, firms have to decide how big a system to acquire and whether, and, if so, how to charge users for it subsequently. Which is true?
Charge: None Likely consequence: Firm acquires more capacity than needed
Cost allocation provides a service firm a basis for evaluating the:
Cost and profitability of its services
Which of the following is not normally considered an advantage to decentralization?
Decisions will be made consistently throughout the company
Which of the following is normally considered an advantage to decentralization?
Delegating decision making to the lowest level possible enables an organization to give a timely response to opportunities and problems
Which of the following describes the goal that should be pursued when setting transfer prices?
Establish incentives for autonomous division managers to make decisions that are in the overall organization's best interest
Which of the following statements regarding fixed costs is incorrect?
Expressing fixed costs on a per unit basis usually is the best approach for decision-making
What practice is present when divisional managers throughout an organization work together in an effort to achieve the organization's goal?
Goal congruence
Consider the following statements about goal congruence: I. Goal congruence is obtained when managers of submits throughout an organization strive to achieve the goals set by top management II. Managers are often more concerned about the performance of their own subunits rather than the performance of the entire organization II. Managers are often more concerned about the performance of their own subunits rather than the performance of the entire organization. III. Achieving goal congruence in most organizations is relatively straightforward and easy to accomplish
I & II.
Which of the following is not one of the objectives of cost allocation?
Identify production constraints
Which of the following costs would not be included as part of manufacturing overhead?
Insurance on delivery vehicles
In making decisions about whether to sell or further process joint products or by-products, allocation of common or joint costs is:
Irrelevant and should be ignored
Which one of the following is NOT an outcome of adopting decentralization?
It may eliminate goal congruence problems
Which of the following represents a disadvantage of decentralization in organizations?
Lower-level managers will make decisions from the perspective of their own self-interests and perceptions of the organization's goals and strategy
The objectives of cost allocation are to:
Motivate effort, provide incentives, and fairly determine rewards
Which one of the following methods of allocating joint costs to joint products on the basis of estimated sales values at the split-off point?
Net realizable value method
The learning curve in cost estimation is a good example of:
Non-linear cost behavior
Which of the following business unit performance measures could be appropriately used to evaluate a cost center?
None of the above
Which of the following statements regarding responsibility centers is not correct?
None of the above
SAR's main competitor, AK-47 currently has a negative contribution margin, to reach the breakeven point:
None of the above changes will result in AK-47 reaching the breakeven point.
Which of the following statements does not represent a limitation of using return on investment (ROI) for measuring and evaluating performance?
ROI cannot be used to compare divisions of different sizes
Allocation of service department costs to producing departments is the most complex of the allocation phase of departmental cost allocation because of the likely presence of:
Reciprocal flows
Assuming SAR's degree of leverage (DOL) is higher than its main competitor, AL-47. What is the correct interpretation?
SAR's profits are more sensitive to percentage changes in sales relative to AK-47.
Which of the following is the correct mathematical expression for return on investment?
Sales margin x capital turnover
Which step of estimating a cost function using quantitative analysis is most difficult step for a manger to implement in cost analysis?
Step 3: Collect Data of the Dependent Variable and the Cost Driver
Least-squares regression analysis output produces a variety of information and statistics. Which of the following statistics provides information for fixed costs?
T-statistic and p-value for the alpha (intercept) coefficient
Which is not true of the various methods of allocating service department costs?
The direct method is quick to compute, accurate, and has low information requirements
A manager uses regression to express sales as a function of advertising expenditures (X1), and per capita income (X2) in your sales area. The following multiple linear regression equation is developed: Y= 10 + .51X1 + .45X2 The coefficient of determination (R2) is .96 Determine which of the following conclusions is valid regarding the coefficient of determination:
The regression line fits the data used in the sample very well. There is a strong indication of the relationship of the two variables with sales.
You are going to dinner with three friends, one who likes streak, another wine, and the third is a vegetarian (which is assumed to be the least expensive) Which is true?
The wine-drinker will argue for equal shares, and will guzzle (drink) as fast (and/or as much) as possible
Which not a reason for allocating internal costs to cost objects?
To determine the selling price of products
Net Realizable Value (NRV) of a product is:
Ultimate sales value - additional processing and selling cost
A steeply sloped regression line indicates:
a strong relationship between the cost driver and costs
Manufacturing overhead consists of:
all manufacturing costs, except direct materials and direct labor
Conversion costs consist of which of the following?
direct labor and manufacturing overhead costs
An inaccurate cost function with a constant that is estimated too high may MOST likely result in
evaluating a weak manager as providing strong performance
The advertising costs that Pepsi incurred to air its commercials during the Super Bowl can best be described as a:
fixed cost
The ROI calculation will indicate:
how effectively a company used its invested capital
