Managerial Accounting Final
Why isn't accounting get income used in the net present value and internal rate of return methods of making capital budgeting decisions superior to other methods?
Accounting net income is based on accruals rather than on cash flows. Net present value and internal rate of return focus on cash flows
a cost that can be eliminated by choosing one alternative over another in a decision
Avoidable cost
A machine or some other part of a process that limits the total output of the entire system
Bottleneck
If Make > Buy then
Buy
What is the danger in allocating common fixed costs among products or other segments of an organization?
Can make a product appear to be unprofitable where it may be profitable
Identify two assumptions associated with discounted cash flow methods of making capital budgeting decisions.
Cash flows officer at the end of a period Cash inflows are immediately reinvested at a rate of return equal to the discount rate
a limitation under which a company must operate such as limited available machine time or raw materials, that restricts the company ability to satisfy demand
Constraint
What is the difference between capital budgets screening decisions and capital budgeting preference decisions?
Decision; concerned with whether a proposed investment project passes a present hurdle Preference; concerted with choosing from among two or more alternative investment projects, each which has passed the hurdle
Relevant Cost = Avoidable cost = incremental cost
Differential Cost =
a difference cost between any two alternative
Differential cost
a difference in revenue between any two alternatives
Differential revenue
relevant benefit
Differential revenue =
How doe opportunity cost enter into a make or buy decision?
If the company makes part rather than buy then the companies facilities must be used to make part. The opportunity cost is measured by the benefits of the alternative use of that facility
What guideline should be used in determine whether a join product should be sold at the split off point or processed future?
If the incremental revenue from further processing exceeds the incremental cost of further processing, products should be processed further
"If a product line is generating a loss, then it should be discontinued?" Do you agree?
It depends. loss may be the result of allocated common costs or of sunk costs that cannot be avoided if its dropped. A product should be discontinued only if the contribution margin that will be lost as a result of dropping product
Why are discounted cash flow methods of making capital budgeting decisions superior to other methods?
It recognizes the time value of money and take into account all future cash flows
two or more products that a re produces from a common input
Joint costs
Give four examples of possible constraints
Machine time, director labor time, floor space, raw materials
If Make < Buy then
Make
a decision concerning whether an item should be produced internally or purchased from an outside supplier
Make or buy decision
The difference between the present value of an investment projects cash and inflows and the present value of its cash outflows
Net present value
From a decision making point of view, should joint costs be allocated among joint products
No
"Variable costs and differential costs mean the same thing" Do you agree?
No, A variable costs is a cost that varies in total amount in direct proportion to changes in the level of activity. A differential cost is the difference in cost between two alternatives.
"All future costs are relevant in decision making" Do you agree?
No, future costs that differs between the alternatives are relevant
"Sunk costs are easy to spot, they are the fixed costs associated with a decision" Do you agree?
No, not all fixed costs are sunk, only for which the cost has already been incurred. A variable cost can be a sunk cost if it has already been incurred
Are variable costs always relevant?
No, they are relevant only if they differ in total between the alternatives under consideration
When dropping a product from a product line, what costs are relevant? Irrelevant?
Only those costs that would be avoided as a result of dropping the product line are relevant in the decision. Costs that will not be affected by the decision are irrelevant.
potential benefit that is given up when one alternative is selected over another
Opportunity cost
What is meant by the term discounting?
Process of computing the present value of a future cash flow, gives recognition to the time value of money and makes it possible to add together cash flows that occur at different times
How will relating product contribution margins to the amount of the constrained resource they consume help a company maximize its products?
Profits maximized when total CM is maximized. Maximized total CM by focusing on the products with the greatest amount of CM/unit of the the constrained resource
an action that increases the amount of a constrained resource. Equivalently, an action that increases the capacity of the bottleneck
Relaxing the constraint
A benefit that differs between alternatives in a decision
Relevant benefit
difference in cost between any two alternatives
Relevant cost
a decision as to whether a join product should be sold at the split off point or sold after further processing
Sell or process further decision
a one time order that is not considered part of the company normal ongoing business
Special order
That point in manufacturing where some or all of the join products can be recognized as individual products
Split off point
any cost that has already been incurred and that cannot be changed by any decision made now or in the future
Sunk cost
the involvement by a company in more than one of the activeness in the entire value chain from development though production, distribution, sales, and after sales service
Vertical integration
Can net present value be negative?
Yes, if the present value of the outflows is greater than the present value of the inflows
The process of planning significant investments in projects that have long term implications such as the purchase of new equipment or the introduction a new product
capital budgeting
The average rate of return a company must pay to its long term creditors and shareholders for the use of their funds
cost of capital
Change in cost that will result from some proposed action
incremental cost
the discount rate at which the nat present value of an investment project tis zero; the rate of return of a project over it useful life
internal rate of return
Joint costs are _______ when considering the profitability of one product
irrelevant
Joint costs are _______ when what to do from split off point to process further
irrelevant
Unavoidable costs =
irrelevant costs
costs that are incurred up to the split off point
joint costs
two or more products that are produced from a common input
joint products
When you drop a product, you _________ CM of that product. You save ___________ ________ expenses. The difference between the ______ of that product - the _______________ _____________ of that product = how much you ___________ in _____________ ____________ ____________
loose, avoidable fixed, CM, avoidable cost, loose, Net operating income
actual cash outlays for salaries, advertising, repairs, and similar costs
out of pocket costs
the length of time that it takes for a project to fully recover its initial cost out of the net cash flows it generates
pay back period
the follow up after a project has been approved and implemented to determine whether expected results were actually realized
post audit
Joint costs are _______ when considering profitability of entire operation
relevant
Avoidable costs =
relevant costs
a decision as to whether a proposed investment project is acceptable
screening decision
point in the manufacturing process where join products can be recognized as individual products
split off point
the concept that a dollar today is worth more than a dollar a year from now
time value of money
Activities from development to production to after sales services
value chain
What is an allocation fixed cost?
what you are looking for
current assets less current liabilities
working capital