Accounting Chapter 6

Irrelevant costs include:

-future costs that do not differ between alternatives -sunk costs

Isolating relevant costs is desirable because:

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

Given a reference value of $3,500 and a differential value of $4,200, the value-based price will be greater than or equal to $ and less than or equal to $

3,500 or 7,700

avoidable, incremental

Synonyms for differential costs include ______ cost.

constraint

When a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a(n) __________________

original cost of the car

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

Which of the following are ways in which to calculate the benefit of selecting one alternative over another?

-The difference between the net operating income for the two alternatives. -An analysis that just looks at the relevant costs and benefits. -An analysis that looks at all costs and benefits and identifies those that are differential.

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

False

True or false: Depreciation of existing assets is relevant to decisions.

Fixed Costs

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

Customers and competitors play important roles in determining a company's price

ceiling

The highest price customers are willing to pay is called the price .

ceiling

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

increase the capacity of the bottleneck

Deciding what to do with a joint product at the split-off point is a:

sell or process further decision

When a constraint exists, companies need to focus on maximizing

total contribution margin

Companies that use_________-__________pricing establish selling prices based on the economic worth of benefits their goods and services provide to customers.

value-based

Establishing selling prices based on the economic worth of benefits their goods and services provide to customers is the basis of:

value-based pricing

When demand for products exceeds the production capacity, a_________,_________ - ________decision must be made.

volume trade-off

Steps in the absorption costing approach are:

determine markup percentage on absorption cost calculate unit product costs multiply unit product cost by 1 + markup percentage

If price changes significantly impact product sales, demand for the product is said to be . If the change in price does not greatly impact sales, demand is .

elastic, inelastic

The lowest price a company can charge and still make incremental profits on the sale is the price

floor

n 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

A company's price floor is determined by

incremental

Generally speaking, managers should set higher prices when demand is:

inelastic

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

may or may not be an avoidable cost of the segment

If a company has a resource that could be used for something else, the_________ cost is the profit that could be derived from the best alternative use of the resource.

opportunity

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

opportunity

Product markup is generally expressed as a(n) of cost.

percentage

The costs provided by a well-designed activity-based costing system are _____ relevant to a decision.

potentially

A product's markup is the difference between its selling___________ and its___________ .

price, cost

The absorption costing approach to cost-plus pricing:

relies on forecasted unit sales assumes that customers will pay whatever price the company decides to charge

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

False

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

irrelevant

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

Two or more products produced from a common input are:

joint products

A one-time order that is not considered part of the company's normal ongoing business is a _______ order.

special

A one-time sale that is not considered part of the company's normal ongoing business is referred to as a(n)___________ -____________decision.

special order

The market is instrumental in determining a product's price through the laws of_________ and__________ .

supply and demand

The process of determining the maximum allowable cost for a product and developing a profitable prototype is called

target costing

isolate relevant costs from irrelevant costs

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

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

Using the following information, calculate the target cost per sewing machine. Amount to be invested $1,500,000 Desired profit percentage 20% Selling price per sewing machine $40 Projected unit sales 25,000

28.00 Reason: (($40 x 25,000) - (0.2 x $1,500,000))/25,000 = $28.00

irrelevant

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

sunk cost

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

make or buy decision

Determining whether to carry out an activity in the value chain internally or use a supplier is a ________ decision.

relevant

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

In general, the more sensitive customers are to price, the ____ the optimal selling price will be.

Lower

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

Optimal selling prices can be calculated using Microsoft Excel

Solver

opportunity

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

The first step in decision making is to:

define the alternatives

It is assumed under the_________ __________ approach that customers are required to buy a product at whatever price the seller deems appropriate.

absorption costing

Factors in determining the markup percentage using the absorption costing approach to cost-plus pricing include:

-adequate return on investment -absorption costing unit product cost -selling, general, and administrative expenses

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

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

To calculate the optimal selling price using Microsoft Excel's Solver requires:

-current unit sales -current selling price -percentage change in selling price

A company must make a volume trade-off decision when they

-do not have enough capacity to satisfy the demand for all of its products Reason: Limited production capacity requires a company to made a volume trade-off decision. -must trade off units of one product for units of another due to limited production capacity

opportunity cost

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

will always

The total cost approach and the differential approach methods of decision analysis ______ provide the same correct answer.

Fixed

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

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

Allocated common fixed costs

Anything that prevents you from getting more of what you want is a(n)____________ .

constraint

If a price change has little effect on unit sales, the demand is considered to be:

inelastic

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

intermediate

Two or more products that are produced from a common input are known as______________ products.

joint

The process of determining the maximum allowable cost for a product and developing a profitable prototype is called:

target costing

The target costing approach was developed because:

the market really determines prices. most of a product's cost is determined in the design stage.

Less dependence on suppliers is an advantage of:

vertical integration

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

When a product has an established market price

-there is no reason for suppliers to charge less than the established price -consumers will not pay more than the established price

Miracle Clean's variable costs are $3.00 per bottle and Fixed Expenses are $350,000 per year. The company currently sells 150,000 bottles for $6.50 which results in profit of $175,000. The company is considering raising the selling price to $7.00 per bottle which is expected to decrease sales by 20%. If the price is raised, the number of units that must be sold to keep the profits unchanged is .

131,250 Profit= P-V x Q-Fixed expenses 30,000 = (5.50-2.00) X Q -570,000 600,000=3.50Q Q=171,429

Vertical Integration

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

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. Reason: 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 X 20,000 units).

True or false: Given a reference value of $5,500 and a differential value of $3,200, the value-based price will be greater than $3,200 and less than $5,500.

False

True or false: In the absorption approach to cost-plus pricing, the cost base is the variable costing unit product cost.

False

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

True

True or false: Mingling irrelevant and relevant costs may cause confusion and distract attention from critical information.

True

False

True or false: Some decisions only have one alternative.

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

Vertical integration

The formula used to calculate markup percentage on absorption cost includes:

required ROI multiplied by investment unit product cost multiplied by unit sales selling, general and administrative expenses

Deciding what to do with a joint product at the split-off point is a(n) or decision.

sell or process further