Cost Accounting - Chapter 4 - Concepts - Fundamentals of Cost Analysis for Decision Making

Which of the following statements are correct? - Determining what products or services to offer is a common managerial decision. - Product choices are generally thought of as long run decisions - Product decisions may be limited by capacity in the short-run. - The choice of which products and services to offer has little or no effect on costs

- Determining what products or services to offer is a common managerial decision. - Product decisions may be limited by capacity in the short-run.

Using full costs for pricing decisions can be justified when a firm ______. - enters into a contract with a governmental agency to supply a product - accepts a one-time special order to supply a product that will not impact other sales - enters into a long-term contractual relationship to supply a product

- enters into a contract with a governmental agency to supply a product - enters into a long-term contractual relationship to supply a product NOT accepts a one-time special order to supply a product that will not impact other sales because differential cost is appropriate in this case

When considering the differential costs versus total costs approach, the ______. (select all that apply) - total cost approach provides information regarding total resources required - differential format is always preferred for short run decision - differential format can be derived from the total format

- total cost approach provides information regarding total resources required - differential format can be derived from the total format

Which of the following statements is true? -OPEC is a prime example of an organization that uses price fixing. - The idea behind price fixing is to set prices at a level lower than equilibrium prices in competitive markets. - Price fixing is illegal in almost all developing countries -Informal or unspoken agreements to fix prices may be considered illegal. - Companies can only be charged with price fixing for domestic sales

-OPEC is a prime example of an organization that uses price fixing. -Informal or unspoken agreements to fix prices may be considered illegal.

True/False: Differential costs are not impacted by the time period being analyzed.

False Reason: Differential costs are much higher in the long run than they are in the short run

Given the following information, if the company is offered a buy price for 5,000 units @ $8.00 per unit, the company should ______. Direct materials ($3.00 per unit) $15,000 Labor ($2.40 per unit) $12,000 Variable overhead ($1.20 per unit) $6,000 Fixed overhead $10,000 Common costs $4,000 If the company buys the units, all of the variable costs are differential as is $1.00 per unit of fixed overhead. None of the common costs will be eliminated if the units are purchased. - Make the component because they will save $2000

Make the component because they will save $2,000 Reason: Variable costs $33.000 ((15,000+12,000+6000) +5000 fixed costs=38000 differential costs vs 40,000 to buy or a 2000 savings to continue to make the product 5000 of the fixed cost is not differential

A company currently has two product lines and is considering dropping Product XYZ. Product ABC Product XYZ Total Sales revenue $90,000 $60,000 $150,000 Cost of goods sold (all variable) $35,000 $40,000 $75,000 Contribution margin $55,000 $20,000 $75,000 Fixed costs* $30,000 $25,000 $55,000 Operating Profit (Loss) $25,000 ($5,000) $20,000 * Of the $55,000 of total fixed costs, $30,000 is rent. Each product is allocated $15,000. The rent will continue even if the product is dropped. The rest of the fixed costs are related to each product and would be saved if the product was dropped. Should Product XYZ be dropped? Why or why not? No, because the operating profit would be $10,000 less if Product XYZ was dropped.

No, because the operating profit would be $10,000 less if Product XYZ was dropped. Reason: If XYZ is dropped, the company will lose $20,000 in contribution margin and save $10,000 in fixed costs ($25,000-15,000) so gross profits would decrease by $10,000.

Which of the following is NOT a short-run pricing decision? - Pricing a main product in a large market - A one-time special order - Adjusting product mix and volume in a competitive environment

Pricing a main product in a large market

Which of the following statements is true? - A company that is vertically integrated relies on outside suppliers for many critical components in the value chain - Some factors in a make-or-buy decision are not easily quantified. - A make-or-buy decision should be based on lowest cost alone - A make-or-buy decision is almost always a simple, one-time choice.

Some factors in a make-or-buy decision are not easily quantified.

True/False: Ultimately dumping can cause the same harm to consumers that is caused by predatory pricing.

True Reason: If a foreign county dumps goods in the US, it could drive domestic companies out of business, which would eventually result in higher prices, much like predatory pricing.

When a company engages in predatory pricing, the ultimate goal is to ______. - provide high quality products at low prices - act like a monopolist - achieve a targeted profit - cause competitors to raise their prices

act like a monopolist

Given the following, a special order for 500 units @ $10 each should ______. Sales (10,000 units @ $14 each) $140,000 Variable costs (10,000 units @ $8 each) $80,000 Total contribution margin $60,000 Allocated fixed costs $20,000 Operating profit $40,000 - be accepted because the profit will be $2 per unit ($1,000 total). - not be accepted because the loss will be $4 per unit ($2,000 total) - not be accepted because there will be no profit or loss - be accepted because the profit will be $4 per unit ($2,000 total)

be accepted because the profit will be $2 per unit ($1,000 total). Reason: $10 selling price - $8 variable cost = $2 profit $2 profit x 500 units = $1,000

A constraining resource in which the work to be performed limits production is called a(n) _________

bottleneck

An operation where the work required limits production is a(n) ______. - marginal cost - throughput - opportunity cost - bottleneck

bottleneck

Given the following, determine if a buy price for 3,000 units @ $4.00 per unit should be accepted or if the company should continue to make the 3,000 units. Direct materials ($1.00 per unit) $3,000 Labor ($1.60 per unit) $4,800 Variable overhead ($1.10 per unit) $3,300 Fixed overhead $1,500 Common costs $2,000 If the company buys the component, all of the variable costs and fixed overhead costs are differential. None of the common costs will be eliminated if the component is purchased. Based on price, the company should (make/buy) ____________ the component at a net total advantage of $______.

buy; $600

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decrease; $1000

The process of estimating revenues and costs of alternative actions and comparing them to the status quo is called ____________ ____________.

differential analysis

Comparing alternative actions with the status quo in order to make decisions is the focus of _______ - peak run pricing - long run pricing - cost volume profit analysis - differential analysis

differential analysis

When a company exports its product to consumers in another country at an export price below the domestic price, _____________ has occurred

dumping

When considering a special order, ______. - other sales must always be considered - full cost should be considered - fixed costs may be irrelevant

fixed costs may be irrelevant Other sales only need to be considered if the special order price will affect other business at the company Only costs that will change should be considered

When setting prices, most firms rely on ______. - variable and fixed manufacturing costs only - differential cost - full cost information - market conditions

full cost information not differential costs because this is true of short run pricing decisions and not market conditions because firms make short term price adjustments based on market conditions.

Pricing a product in a market where there is considerable leeway in setting prices is an example of a(n)______ -_______ pricing decision.

long run

A diner is deciding whether to use its own ingredients to prepare meals or purchase frozen prepared items from a supplier. This is an example of a (n) ______.

make-or-buy decision

Differential costs ______. - are the same for both long run and short run pricing - may be approximated by full costs in the long run - never include fixed costs - are used to set prices in governmental agency contracts

may be approximated by full costs in the long run

A company is considering whether to continue to make a component or buy it from an outside supplier. If they buy the component the manufacturing facility currently being used will be idle. If the company has no alternative use of the facility, the ______ cost associated with this decision is zero

opportunity

Utility companies often engage in ______-_______ pricing in providing services at high demand levels

peak load

Setting prices highest when the quantity demanded for the product approaches the physical capacity to produce it is - predatory pricing - price discrimination - target pricing - price fixing - peak load pricing

peak load pricing

Driving competitors out of the market by setting prices low is the intent of ____________ ______________.

predatory pricing

Selling identical goods or services to different customers at different prices is ______. - target pricing - peak-load pricing - predatory pricing - price fixing - price discrimination

price discrimination

When airlines sell tickets to customers who stay over Saturday night for less than tickets to customers who fly on Saturday, they are engaging in _________ __________

price discrimination

The agreement among business competitors to set prices at a particular level is ______ - target pricing - price discrimination - predatory pricing - peak-load pricing -price fixing

price fixing

Given the following, a special order for 100 units @ $5 each will result in a (profit/loss) ______________of $_______ from the special order. (Enter profit or loss and the dollar amount as a whole number.) Sales (2,000 units @ $9 each) $18,000 Variable costs (2,000 units @ $4 each) $8,000 Total contribution margin $10,000 Allocated fixed costs $4,000 Operating profit $6,000

profit 100

Product choices are generally considered to be ______ decisions.

short run

If a company is not operating at full capacity, accepting a(n) ____________ ______________ from a customer will not affect other sales and is usually a short-run occurrence.

special order

Using "price-based costing" instead of "cost-based pricing" is the concept of __________ ___________.

target costing

The estimated price that potential customers are willing to pay for a product or service is the ______. - target price - target cost - peak-load price - differential cost

target price not target cost because that's the estimated long run cost of a product or a service that will enable the company to achieve the targeted profit.

When doing an analysis, an advantage of the ______ format is that it provides information to managers about all resources required. - total - differential

total

A company is considering whether to continue to make a component or buy it from an outside supplier. If they buy the component the manufacturing facility currently being used will be idle. If the company has no alternative use of the facility, the opportunity cost associated with this decision is ______. - equal to the buy price - zero - equal to the difference between the buy price and the differential cost of making the product - equal to the differential make cost

zero