Chapter 13

One of the great dangers in allocating common (1) costs is that such allocations can make a product line look less profitable than it really is. (Enter only one word per blank.)

1. fixed

When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative (1) (2). (Enter only one word per blank.)

1. income 2. statements

An increase in cost between two alternatives is a(n) (1) cost. (Enter only one word per blank.)

1. incremental

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 a product is past the split-off point, but is not yet a finished product, it is called a(n) (1) product. (Enter only one word per blank.)

1. intermediate

Two or more products that are produced from a common input are known as (1) products. (Enter only one word per blank.)

1. joint

Being less dependent on suppliers and making profits on both parts and the final product are advantages of (1) (2). (Enter only one word per blank.)

1. vertical 2. integration

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

irrelevant

Two or more products produced from a common input are called ______.

joint products

True or false: Depreciation of existing assets 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

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

contribution margin per unit of constraint

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

Costs that have no impact on future cash flows and are irrelevant to decisions are ______ costs.

sunk

Less dependence on suppliers is an advantage of ______.

vertical integration

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

Anything that prevents you from getting more of what you want is a(n) (1). (Enter only one word per blank.)

1. constraint

Differential revenue is an example of a(n) ______ benefit.

relevant

Select all that apply A company is considering buying a component part that they currently make. Which of the following items related to the equipment currently being used to make the component are relevant to the decision?

alternative uses for the equipment salvage value

A limited resource of some type that restricts the company's ability to satisfy demand is a(n) ______.

constraint

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) (1) or (2) (3) decision. (Enter only one word per blank.)

1. sell 2. process 3. further

True or false: Opportunity costs are not found in accounting records because they are not relevant to decisions.

False

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

True

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

the total cost approach only

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

fixed costs

A one-time sale that is not considered part of the company's normal ongoing business is referred to as a(n) (1) (2) decision. (Enter only one word per blank.)

1. special 2. order

When a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a(n) (1). (Enter only one word per blank.)

1. constraint

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 ______. 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 would be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. Should the company buy the part or continue to make it?

continue to make — $60,000 advantage.

When considering decision alternatives, both relevant and irrelevant costs are included when using the (1) (2) approach. (Enter only one word per blank.)

1. total 2. cost

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

relevant

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

sunk

When a resource, such as space in the factory, has no alternative use, its opportunity cost is ______.

zero

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 (1) costs. (Enter only one word per blank.)

1. joint

The split-off point is the point in the manufacturing process at which the (1) products can be recognized as separate products. (Enter only one word per blank.)

1. joint

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) (1) or (2) decision. (Enter only one word per blank.)

1. make 2. buy

If a company has a resource that could be used for something else, the (1) cost is the profit that could be derived from the best alternative use of the resource. (Enter only one word per blank.)

1. opportunity

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) (1) cost. (Enter only one word per blank.)

1. sunk

When demand for products exceeds the production capacity, a(n) (1) (2) - (3) decision must be made. (Enter only one word per blank.)

1. volume 2. trade 3. off

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

Allocated common fixed costs

Select all that apply 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

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

opportunity

Select all that apply Irrelevant costs include ______.

sunk costs future costs that do not differ between alternatives

Space being used that would otherwise be idle has a(n) (1) cost of zero. (Enter only one word per blank.)

1. opportunity

Select all that apply Which of the following should not be included in the analysis when making a decision?

Non-differential future costs Sunk costs

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

contribution margin

Select all that apply 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

A decision to carry out one of the activities in the value chain internally rather than to buy 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

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

income statements

True or false: Some decisions only have one alternative.

False

The first step in decision making is to ______.

define the alternatives

A business segment should only be dropped if a company can save more in ______ costs than it loses in contribution margin.

fixed

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

increase the capacity of the bottleneck

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

irrelevant

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

isolate relevant costs from irrelevant costs

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

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