Chapter 11: Differential Analysis: The Key to Decision Making

Irrelevant costs include ______.

future costs that do not differ between alternatives sunk costs

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

Allocated common fixed costs

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.

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.

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

contribution margin

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

contribution margin per unit of constraint

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

differential

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 there is a constrained resource, the best way to increase profits is to ______.

increase the capacity of the bottleneck

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

incremental

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

intermediate

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

isolate relevant costs from irrelevant costs

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

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

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

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

profits

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

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

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

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 ______ _______ approach.

total cost

Less dependence on suppliers is an advantage of ______.

vertical integration

Which of the following should not be included in the analysis when making a decision?

Sunk costs Non-differential future costs

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

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

income statements

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

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

If, by dropping a product line, a company cannot avoid as much in fixed costs as it loses in contribution margin, the company should ______ the product line.

keep

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

make; buy

Space being used that would otherwise be idle has an _______ cost of zero.

opportunity

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

opportunity

When planning a trip and deciding whether to drive or fly, 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

Costs and benefits that always differ between alternatives are ______ costs and benefits.

relevant

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

relevant

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

special

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

sunk

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

volume trade-off

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

may or may not be

The first step in decision making is to ______.

define the alternatives

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

fixed costs

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

True

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

vertical integration

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 ______.

continue to make the part — $60,000 advantage 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).