Mang acc ch 11,12,13
Which of the following are valid reasons for eliminating a product line 1. The product lines contribution margin is negative 2. The product lines traceable fixed costs plus its allocated common corporate costs are less than its contribution margin
1
In a sell or process further decision, which of the following costs are relevant? 1. a variable production cost incurred prior to the split-off point 2. an avoidable fixed production cost incurred after the split-off point
2
All other things being the same, which of the following would increase the residual income? A. Decrease in average operating assets. B. Decrease in sales. C. Increase in minimum required return. D. Decrease in net operating income.
A
In setting a transfer price, which of the following should not be considered? A. Fixed production costs of the buying division. B. Production capacity of the selling division. C. Product demand from outside customers. D. Costs eliminated by internal transfers.
A
Net operating income is defined as: A. Net income plus interest and taxes. B. Sales minus variable expenses. C. Sales minus variable expenses and traceable fixed expenses. D. Contribution margin minus traceable and common fixed expenses.
A
The discount rate must be specific in advance for which of the following methods. A. Net Present Value B. Internal Rate of Return
A
The internal rate of return of an investment project is the A. discount rate that results in a zero net present value for the project B. minimum acceptable rate of return C. weighted average rate of return generated by internal funds D. company's cost of capital
A
An investment for which the net present value is $300 would result in which of the following conclusions A. the net present value is too small; the project should be rejected B. the rate of return of the investment project is greater than the required rate of return C. The net present value method is not suitable for evaluating this project; the internal rate of return method should be used. D. The investment project should only be a accepeted if net present value is zero; a positive net present value indicates an error in the estimates associated with the analysis of this investment.
B
Costs which are always relevant in decision making are those costs which are: A. variable B. avoidable C. sunk D. fixed
B
For performance evaluation purposes, the variable costs of a service department should be charged to operating departments using: A. The actual variable rate and the budgeted level of activity for the period. B. The budgeted variable rate and the actual level of activity for the period. C. The budgeted variable rate and the budgeted level of activity for the period. D. The actual variable rate and the peak-period or long-run average servicing capacity.
B
If a company has computed the project profitability index of an investment project as .15, then A) the projects internal rate of return is less than the discount rate. B) the projects internal rate of return is greater than the discount rate. C) the projects internal rate of return is equal to the discount rate. D) the relation between the rate of return and the discount rate is impossible to determine from the given data.
B
Managerial performance can be measured in many different ways including return on investment (ROI) and residual income. A good reason for using residual income instead of ROI is: A. Residual income can be computed without having to measure operating assets. B. Managers are more likely to accept projects that are beneficial to the company. C. ROI does not take into account both turnover and margin. D. A minimum rate of return does not have to be specified when the residual income approach is used.
B
The capital budgeting method that recognizes the time value of money by discounting cash flows over the life of the project, using the company's required rate of return as the discount rate is called the: A. simple rate of return method B. the net present value method C. the internal rate of return method D. the payback method
B
Freestone company is considering renting machine y to replace machine x. It is expected that y will waste less direct materials than does x. If y is rented, x will be sold on the open market. For this decision which of the following factors are relevant 1. Cost of direct materials used 2. Resale value of machine x
Both
Spring Company has invested $20,000 in a project. Spring's discount rate is 12% and the project profitability index on the project is zero. Which of the following statements would be true? 1) The net present value of the project is $20,000 2) The projects internal rate of return is equal to 12%
Both
A general rule in relevant cost analysis is A. variable costs are always relevant B. fixed costs are always irrelevant C. differential future costs and revenues are always relevant D. depreciation is always irrelevant
C
If a portion of the actual cost incurred by a service department is not charged to operating departments, then at the end of the period, this uncharged cost should be: A. Allocated equally between the other departments. B. Allocated between the other departments in proportions to budgeted activity. C. Treated as a variance of the service department. D. Treated as a variance of the other departments.
C
If an investment has a project profitability index of .15, then the A. projects internal rate of return is 15% B. discount rate is greater than the projects internal rate of return C. net present value of the project is positive D. the discount rate is 15%
C
If the internal rate of return is used as the discount rate in computing net present value, the net present value will be A. positive B. Negative C. Zero D. unknown
C
Manufacturing Cycle Efficiency (MCE) is computed as: A. Throughput Time + Delivery Cycle Time. B. Process Time + Delivery Cycle Time. C. Value-Added Time + Throughput Time. D. Value-Added Time + Delivery-Cycle Time.
C
Residual income: A. Is the return on investment (ROI) percentage multiplied by average operating assets. B. Is the net operating income earned above a certain minimum required return on sales. C. Is the net operating income earned above a certain minimum required return on average operating assets. D. Will always be greater than zero.
C
When there is a production constraint, a company should emphasize the products with A. highest unit CM (contribution margin) B. highest CM ratios C. highest CM per unit of the constrained resource D. highest CM and CM ratios
C
Which of the above conditions provide a way in which a manager can improve return on investment? A. Only I B. Only I and II C. Only I and III D. Only II and III
C
Which of the following would be an argument for the use of net book value in the computation of operating assets in return on investment calculations? A. It allows the manager to replace old, worn-out equipment with a minimum adverse impact on ROI. B. It allows ROI to decrease over time as assets get older. C. It is consistent with how plant and equipment items are reported on the balance sheet. D. It eliminates both age of equipment and method of depreciation as factors in ROI computations.
C
Because continuous improvement is very difficult, the emphasis in the balanced scorecard tends to be on meeting preset standards. True False
False
A company that is seeking to increase ROI should attempt to decrease: A. Sales. B. Turnover. C. Margin. D. Average operating assets.
D
Contribution income statements are used to measure the performance of: A. Bost centers. B. Both cost centers and profit centers. C. Both cost centers and investment centers. D. Both profit centers and investment centers.
D
For performance evaluation purposes, any variance between budgeted fixed costs and actual fixed costs in a service department: A. Should be allocated both to operating departments and to other service departments on the basis of usage. B. Should be allocated to operating departments only on the basis of usage. C. Should be allocated to other service departments only on the basis of usage. D. Should be retained in the service department itself.
D
If investment A has a payback period of 3 years and investment B has a payback period of 4 years, then A. A has a higher net present value than B B. A has a lower net present value than B C. A and B have the same net present value D. the relation between investment A's net present value and investment B's net present value cannot be determined from the given information
D
The opportunity cost of making a component part in a factory with no excess capacity is the A. variable manufacturing cost of the component B. fixed manufacturing cost of the component C. total manufacturing cost of the component D. net benefit foregone from the best alternative use of the capacity required
D
Throughput Time consists of: A. Process Time. B. Inspection Time and Move Time. C. Process Time, Inspection Time, and Move Time. D. Process Time, Inspection Time, Move Time, and Queue Time.
D
A balanced scorecard should not contain any performance measures concerning customer satisfaction since the extent to which customers are satisfied is beyond the control of any manager in the company. True False
False
A cost center is not a responsibility center. True False
False
A disadvantage of using ROI to evaluate performance is that it encourages the manager to reduce the investment in operating assets as well as increase net operating income. True False
False
A very useful guide for making investment decisions is: The shorter the payback period, the more profitable the project.
False
All other things being the same, a decrease in average operating assets will decrease return on investment (ROI). True False
False
Charges for service department costs to operating departments should be based on the actual variable costs and the budgeted fixed costs of the service department. True False
False
Depreciation expense on existing factory equipment is generally relevant to a decision of whether to accept or reject a special offer for a companys product
False
Fixed costs are irrelevant in a decision
False
For performance evaluation purposes, any variance over budgeted fixed costs in a service department should be charged to the departments that use the service. True False
False
Generally, a product line should be dropped when the fixed costs that can be avoided by dropping the product line are less than the contribution margin that will be lost
False
If new equipment is replacing old equipment, any salvage recieved from sale of the old equipment should not be considered in computing the payback period of the new equipment.
False
Joint production costs are relevant costs in decisions about what to do with a product from the split off point onward in the production process
False
Managers should not authorize working overtime at a work station that contains a bottleneck
False
Margin equals net operating income divided by sales. True False
False
Move time is considered value-added time. True False
False
Net operating income is income after interest and taxes. True False
False
Operating assets include cash, accounts receivable, and inventory but not any depreciable fixed assets. True False
False
Opportunity cost should be ignored in setting the transfer price. True False
False
Process Time is the only non-value-added component of Throughput Time. True False
False
Projects with shorter payback periods are always more profitable than projects with longer payback periods.
False
Queue time is considered value-added time. True False
False
ROI and residual income are tools used to evaluate managerial performance in profit centers. True False
False
Residual income is the net operating income that an investment center earns above the minimum required return on the investment in fixed assets. True False
False
Return on investment is superior to residual income as a means of measuring performance because it encourages managers to make investment decisions that are more consistent with the interests of the company as a whole. True False
False
Service department costs should not be separated into fixed and variable costs when charging operating departments for their services. True False
False
Setting transfer prices at full cost can lead to good decisions because, among other reasons, full cost takes into account opportunity costs. True False
False
Sunk costs are considered to be avoidable costs
False
The book value of a machine, as shown on the balance sheet, is relevant in a decision concerning the replacement of that machine by another machine
False
The project profitability index is used to compare the internal rates of return of two companies with different investment amounts
False
The simple rate of return is the same as the internal rate of return.
False
The simple rate of return method places its focus on cash flows instead of accounting net operating income.
False
When a division is operating at full capacity, the transfer price to other divisions should not include opportunity costs. True False
False
price is the price charged when a company provides goods or services to an outside company.True False
False
A manufacturing cycle efficiency (MCE) ratio close to 1.00 is desirable because this is the ratio of value-added time to throughput time. True False
True
A profit center is responsible for generating revenue and for controlling costs. True False
True
A sunk cost is a cost that has already been incurred and that cannot be avoided regardless of what action is chosen
True
All profit centers are responsibility centers, but not all responsibility centers are profit centers. True False
True
An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of choosing on alternative over another
True
Average operating assets is used in the numerator to compute turnover in an ROI analysis. True False
True
Avoidable costs are also called relevant costs
True
For performance evaluation purposes, the lump-sum amount of fixed service department costs charged to an operating department should usually be based on either the operating department's peak-period or long-run average needs. True False
True
Future costs that do not differ among the alternatives are not relevant in a decision.
True
Ideally, the base selected for charging a service department's costs to operating departments should be whatever drives those costs. True False
True
If by dropping a product a firm can avoid more in fixed costs than it loses in contribution margin, then the firm is better off economically if the product is dropped
True
If two projects require the same amount of investment, then the preference ranking computed using either the project profitability index or the net present value will be the same.
True
In comparing two investment alternatives, the difference between the net present values of the two alternatives obtained using the total cost approach will be the same as the net present value obtained using incremental cost approach
True
In preference decisions, the profitability index and internal rate of return methods may produce conflicting rankings of projects.
True
Inspection Time is generally considered to be non-value-added time. True False
True
Joint costs are not relevant to the decision to sell a product at the split-off point or to process the product further
True
Land held for possible plant expansion would not be included as an operating asset when computing return on investment (ROI). True False
True
One criticism of the payback method is that it ignores cash flows that occur after the payback point has been reached.
True
One disadvantage of using the actual cost of a product as the transfer price is that it does not provide a strong incentive for the producing division to control its costs. True False
True
Preference decisions attempt to determine which of many alternative investment projects would be the best for the company to accept.
True
Residual income should not be used to evaluate a profit center. True False
True
Return on investment (ROI) equals margin multiplied by turnover. True False
True
Sales dollars is generally a poor base to use in allocating service department costs. True False
True
Suppose a company evaluates divisional performance using both ROI and residual income. The company's minimum required rate of return for the purposes of residual income calculations is 12%. If a division has a residual income of $6,000, then its ROI is greater than 12%. True False
True
The cost of a resource that has no alternative use in a make or buy decision problem has an opportunity cost of zero
True
The fixed costs of service departments should be allocated to operating departments in predetermined lump-sum amounts that are determined in advance. True False
True
The internal rate of return for a project is the discount rate that makes the net present value of the project equal to zero.
True
The selling division in a transfer pricing situation should want the transfer price to cover at least the variable cost per unit plus the lost contribution margin per unit on outside sales. True False
True
The simple rate of return focuses on accounting net operating income rather than on cash flows.
True
Throughput time is the amount of time required to process raw materials into completed products. True False
True
Vertical integration is the involvement by a company in more than one of the steps from securing basic raw materials to the production and distribution of a finished product
True
Wait time is considered non-value-added time. True False
True
When a company has a production constraint, the product with the highest contribution margin per unit of the constrained resource should be given highest priority
True
When used in return on investment (ROI) calculations, operating assets do not include investments in land held for future use and investments in other companies. True False
True
In capital budgeting, what will be the effect on the following if there is an increase in the working capital needed for a project? Net Present Value and Internal Rate of Return
decrease
