Managerial Final Review

Average Operating Assets

(beginning assets + ending assets) / 2

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

Product Costs

All costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead.

Mixed Costs

Costs that contain both a variable- and a fixed-cost element and change in total but not proportionately with changes in the activity level.

Which of the following is not a characteristic of decentralization?

Decentralization reduces how accountable lower-level managers are for the outcomes of their decisions.

Return on Investment (ROI)

Net Operating Income / Average Operating Assets

margin

Net Operating Income / Sales

turnover

Sales / Average Operating Assets

Negotiated transfer prices BLANK

are consistent with decentralization preserve the autonomy of the divisions use the expertise of managers in weighing the costs and benefits of the transfer

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

contribution margin

Period Costs

costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued

An organization in which decision-making authority is spread throughout the organization is BLANK

decentralized

Manufacturing Costs

direct materials, direct labor, manufacturing overhead

Suppose a project with a negative net present value would provide intangible benefits. To estimate the annual value of intangible benefits needed to accept the project, BLANK the negative net present value excluding intangible benefits by the BLANK

divide, present value factor for an annuity

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

false

Net Present Value

have negative initial investment in now column and negative working capital. then put annual cost savings, salvage value, and working capital released in the correct years to follow. This is the total cash flows at the bottom of each column,, multiply this by the discount rates found on the present value of a dollar side of the worksheet. Add all of these together to find the net present value.

When using net present value to compare projects, the total cost approach BLANK

includes all cash inflows and outflows under each alternative is the most flexible method available to compare projects

In an equipment capital budgeting decision, recovering the original investment means that the BLANK

investment has generated enough cash inflows to completely cover the cost of the equipment

Factor of the internal rate of return

investment required / annual net cash inflow

Payback Period

investment required / annual net cash inflow

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

irrelevant

Using sales dollars to allocate fixed costs from service departments to operating departments BLANK.

is simple and straightforward is often a poor base because sales dollars vary from period to period is often viewed as a measure of ability to pay

Typical capital budgeting decisions include BLANK decisions.

lease or buy equipment selection cost reduction

If the internal rate of return is BLANK

less than the hurdle rate the project should be rejected greater than the hurdle rate the project is acceptable

Internal Rate of Return

less than the hurdle rate the project should be rejected greater than the hurdle rate the project is acceptable

The Eye Clinic of Dr. Christensen is investing in some equipment to perform corrective eye surgery. It is expected that the equipment purchase will generate an internal rate of return of 24%. This equipment was chosen over equipment to perform cataract eye surgery. Thus, the internal rate of return of the cataract eye surgery equipment must have been Blank______.

less than the internal rate of return of the corrective eye surgery equipment

When analyzing an investment project, uncertain future cash flows BLANK

may be estimated using computer simulations

annual net cash inflow

net operating income + depreciation

finding residual income

net operating income - (average operating assets x minimum required return)

Working capital BLANK

often increases when a company takes on a new project

Segmented Income Statement

provides revenue and cost data for each segment of the company in a comparative fashion (side by side)

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

relevant

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

relevant

The net present value of a project is BLANK

the difference between the present value of cash inflows and present value of cash outflows for a project used in determining whether or not a project is an acceptable capital investment

Using the market price to set transfer prices may not be the best approach when BLANK

the selling division has idle capacity

If the transfer has no effect on fixed cost, the transfer price from the selling division's standpoint must be equal to or greater than the variable cost per unit + (BLANK ÷ number of units transferred).

total contribution margin on lost sales

When the cash flows associated with an investment project change from year to year, the payback period must be calculated BLANK

by tracking the unrecovered investment year by year

The first step in decision making is to BLANK

define the alternatives

Reggie's Refrigerators is considering the purchase of some new equipment. The company has limited its purchase options to two alternatives. Option A has an internal rate of return of 10%, and option B has an internal rate of return of 13%. If the required rate of return on the project is 9.5%, which option is the preferred choice?

option B is the preferred choice

The length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates is the BLANK

payback period

A manager might reject a proposal using ROI that the manager would accept using residual income. true or false

true

True or false: When calculating the payback period, the depreciation on the investment is excluded and thus must be added back to obtain the project's expected annual net cash inflow.

true

internal rate of return

use the factor and the present value of annuity side of formula sheet to find percentage after amount of years

What are some of the pitfalls of allocating fixed costs on a variable allocation base, such as departmental sales?

Departments with higher or improving sales will be allocated a larger percentage of the costs, thus shifting costs to their departments. Costs allocated to one department are heavily influenced by what happens in other departments.

Which of the following statements is not a weakness of using return on investment (ROI) to evaluate performance?

ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies.

Which of the following statements is incorrect regarding responsibility accounting?

Responsibility accounting refers to the process of evaluating top management on the decisions made by lower-level managers.

Which of the following statements are true?

When using the internal rate of return method, the cost of capital is used as the hurdle rate. When the net present value method is used, the discount rate equals the hurdle rate. The cost of capital may be used to screen out undesirable projects.

Potential advantages of dropping a product line or other segment include BLANK

avoiding more fixed costs than the company loses in contribution margin an overall increase in net operating income

Valid criticisms of evaluating performance based on return on investment (ROI) include managers may BLANK

be put in charge of a business segment that includes committed costs over which a manager has no control reject investment opportunities that are profitable for the company but have a negative impact on a manager's ROI take actions that increase ROI in the short-run at the expense of long-term performance

To screen out undesirable investments, BLANK use(s) the cost of capital.

both the net present value and internal rate of return methods

When a transfer has no effect on fixed costs, to be acceptable to the selling division, the transfer price must BLANK

cover the variable costs per unit cover any lost contribution margin due to the transfer cover any opportunity cost from lost sales

Isolating relevant costs is desirable because BLANK

critical information may be overlooked with the total cost approach irrelevant costs may be used incorrectly in the analysis all information needed for the total cost approach is rarely available

When computing the payback period for a new piece of equipment, the salvage value of the equipment being replaced is BLANK

deducted from the cost of the new equipment

Margin of Safety

difference between your actual or expected profitability and the break even point

When allocating fixed costs of service departments, the fact that operating departments do not need the peak level of service every period BLANK

does not impact the total allocation of costs

determine effect on total net operating income if there is a special order

have a per unit column and the total amount of units column. then find the incremental revenue for both, subtract all the variable and fixed costs to find the total incremental costs. subtract the total incremental costs from the revenue see if there is a financial advantage or disadvantage of the special order.

The payback method BLANK

ignores all cash flows that occur after the payback period does not consider the time value of money is not a true measure of investment profitability

If cost is used as a transfer price, the only division with an opportunity to make a profit on the transfer is the division that BLANK

makes the final sale to an outside party

Assume the selling division has no idle capacity and must give up outside sales, but does not lose anything by selling internally rather than outside. In addition, the buying division has an accurate assessment of how much it costs the company for the transfer to take place. Under this situation, which pricing method is being used?

market price

When managers are evaluated on residual income, rather than on return on investment (ROI), they will be BLANK likely to pursue projects that will benefit the entire company.

more

Conducting a post audit does what?

provides an opportunity to cut losses on floundering projects flags any manager's attempts to inflate benefits or downplay costs in a project proposal provides an opportunity to reinforce and possibly expand successful projects

Capital budgeting decisions BLANK

require a great deal of analysis prior to acceptance involve an immediate cash outlay in order to obtain a future return

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 BLANK

salvage value alternative uses for the equipment

Little Tots Gym has a required rate of return of 13%. The gym is considering the purchase of $12,500 of new equipment. The internal rate of return on the project has been calculated to be 11%. should this project be accepted or rejected?

should be rejected

preparing an analysis to see if a product should be eliminated

start by identifying and adding all the avoidable expenses together. Take this number and subtract it from the contribution margin to see if the net income is better or worse than it would be if the product was not dropped.

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

sunk

break-even point

the point at which the costs of producing a product equal the revenue made from selling the product

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

the total cost approach only

Managers of cost centers are evaluated on BLANK

their ability to control costs in their responsibility center

Operations are able to respond quickly to customers and changes in the environment in a decentralized organization because BLANK

there are fewer managers that must be consulted before a decision is made

The price charged when one segment of a company provides goods or services to another segment of the same company is the BLANK price.

transfer

Working capital is BLANK

treated as a cash outflow when required at the beginning of a project. treated as a cash inflow when released at the end of a project.