Acct 201B Chapter 11

advantages of dropping a product line or segment

- decrease in fixed costs (salarie or advertising) more than losses in contribution margin - increase in net

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

T/F: accounting depreciation of an existing asset is relevant to decisions

False, depreciation spreads sunk which is not relevant

make or buy decision

a decision concerning whether an item should be produced internally or purchased from an outside supplier

Advantage of vertical integration

being less dependent on suppliers realizing the

when dealing with a constrained resource managers should focus their attention on managing the

bottleneck

make or buy equation

buy price - variable cost - position eliminated = advantage/disadvantage x units (negative buy the part, positive make the part)

danger in allocating common fixed costs

can make a product line look less profitable than it really is

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

contribution margin per unit of the constrained resource

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

contribution margin per unit of the constraint

First step in decision making process

define the alternatives being considered

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

fixed costs

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

income statements

when there is a constrained resource the best way to increase profits is to

increase the capacity of the bottleneck

synonyms for differential costs

incremental avoidable cost

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

irrelevant

cost of car insurance and drivers lincesne

irrelevant

in order to prevent confusion and keep attention focused on critical information, it is desirable to

isolate relevant costs from irrelevant costs

when planning a road trip, the ____ is a sunk cost and should be ignored

original cost do the car

When a manager increases the capacity of the bottleneck, it is called:

relaxing (or elevating) the constraint

cost of maintenance and repairs

relevant

costs and benefits that always differ between alternatives are

relevant

only ____ costs and benefits should be included in the analysis

relevant

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

sell; process further

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

special order

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

sunk

Irrelevant costs include:

sunk costs and future costs that do not differ between alternatives

to maximize total contribution margin when a constrained resource exists, produce the products with the

the highest contribution margin per unit of the constrained resource

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

opportunity costs are not usually found in accounting records but they are considered in every decision a manager makes

true

when demand for product exceeds the production capacity

volume trade off decision

idle space being used would have an opportunity cost of

zero