ac 204 ch 13

Which of the following may be an advantage of making a part rather than buying it?

-A smoother flow of parts and materials for production -Less dependence on outside suppliers

Which of the following are synonyms for avoidable cost? (Check all that apply)

-Incremental cost -Differential cost

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

-alternative uses for the equipment -salvage value

Average costs:

-are often misleading -contain sunk costs

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

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. The relevant manufacturing costs for the part is $15 per unit. If the company decides to purchase the part, the space now being used can be used to produce another product that will generate a segment margin of $80,000 per year. Should Andrews continue to make or should they buy the part?

Buy -- $20,000 advantage [The total buy price = 20,000 x $18 or $360,000. The cost to make equals (20,000 x $15) + $80,000 forgone opportunity or 380,000. Thus, there is a $20,000 advantage to buying the part.]

T or F: Depreciation of existing assets is relevant to decisions

False

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

Sunk, non-differential future costs

T/F: Effectively managing an organizations' constraints is key to increased profits

True

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

allocated common fixed costs

A cost that can be eliminated by choosing one alternative over another is a(n) _____ cost.

avoidable

anything that prevents you from getting more of what you want, should ignore fixed costs during trade off decisions

constraint

when a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a _________________.

constraint

when a constraint exists, companies need to focus on maximizing

contribution margin per unit of constraint

The first step in decision making is to:

define the alternative

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

differential

The key to effective decision making is:

differential analysis

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

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

fixed

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

fixed costs

In general, the less sensitive customers are to price, the ______ the optimal selling price will be.

higher

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

Future costs and benefits to not differ b/t alternatives are ____ costs to the decision-making process.

irrelevant

When deciding whether to drive your care or take a train to a destination, the costs for your car insurance and driver's license are:

irrelevant costs

In deciding whether to drive to a location or to take the train, the relaxation factor that comes from not having to drive _______ relevant to the decision.

is

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

isolate relevant costs from irrelevant costs

Two or more products that are produced from a common input are known as _______ products

joing

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

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 or buy decision

Differential costs and benefits that should be considered in a decision:

may be qualitative or quantitative

Space being used that would otherwise be idle has a(n) ___________ cost of zero.

opportunity

When pllaning a trip and deciding whether to drive or fly, the ____ is a sunk cost and should be ignored.

original cost of the car

The cost provided by a well-design activity-based costing system are _______ relevant to a decision.

potentially

effectively managing an organizations constraints is a key to increased _______.

profits

Cost and benefits that always differ between alternatives are ______ costs and benefits

relevant

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

relevant

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

relevant

differential revenue is an example of a _____ benefit

relevant

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

special order

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) ___________ cost.

sunk

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

sunk

Irrelevant costs include

sunk cost, future cost that do not differ between alternatives

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

When considering decision alternatives, both relevant and irrelevant costs are included when using the ______ ______ approach.

total cost

Activities ranging from development to production to after-sales services are called a(n) ______ _______.

value chain

Less dependence on suppliers is an advantage of:

vertical integration

Which term refers to a company that is involved in more than one activity in the value chain.

vertical integration

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

vertical integrations

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

zero

Future cost and benefits that do not differ between alternatives are ____ cost to the decision-making process

irrelevant

If a cost is traced to a segment using activity-based costing, it _________.

may or may not be an avoidable cost of the segment

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 its products

When planning a trip or deciding to drive your car or take the train, gasoline is a:

relevant cost

When demand for products exceeds the production capacity, a _______________ decision must be made

volume trade off

Allocated common costs are:

only relevant to decisions if they re avoidable

Assume you are considering visiting your grandmother for a month this summer. In deciding whether to drive or fly, the ________ is a sunk cost and should be ignored.

original cost of the car

The present trend appears to be towards ________ vertical integration.

less

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

joint products

products that are not yet finished at the point

INTERMEDIATE

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

Increase the capacity of the bottleneck

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

Intermediate

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

False (They ARE relevant to decisions)

True or False: The monthly fee that a student pays to park at school is NOT relevant when deciding whether to take a train or drive for a weekend trio to visit an out-of-town friend.

True

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

Cost benefits that should be ignored when decision making is __________ cost.

irrelevant

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrew's per unit manufacturing cost for 20,000 units is: Cost : Variable manufacturing per unit $12 = $240,000 Supervisor salary per unit $3 = $60,000 Depreciation per unit $1 = $20,000 Allocated fixed OH per unit $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?

Continue to make -- $60,000 advantage [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 * 20,000 units).