Ch 11 Differential Analysis

Average costs:

-contain sunk costs -are often misleading

To effectively deal with a constraint

-efforts should focus on the weakest link -improvements should focus on the constraint

Bottleneck should be analyzed by:

-focus business process improvement efforts on the bottleneck -ensure there is minimal lost time at the bottleneck due to breakdowns and set ups -find ways to increase the capacity of the bottleneck

Irrelevant costs include:

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

Effectively managing an organization's constraints is a key to increased profits.

True

The machine or process that is limiting overall output is called

bottleneck

When a manager increases the capacity of the constraint or ______________, it is called relaxing the constraint.

bottleneck

The benefit from relaxing the constraint equals

contribution margin per unit of constrained resource

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

fixed costs.

When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative

income statements.

An increase in cost between two alternatives is a(n) _____ cost.

incremental

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

may or may not be an avoidable cost of the segment.

Deciding what to do with a joint product at the split off point is a ______________________ or a __________ ___________ decision.

sell process further

When making a decision, irrelevant items are included in both 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

total cost approach.

Activities ranging from development to production to after sales service are called a

value chain

When a company is involved in more than one activity in the entire value chain, it is _________ ___________.

vertically integrated

The present trend appears to be towards __________ vertical integration.

less

When making a decision, only _________ costs and benefits should be included in the analysis.

relevant

It is profitable to continue processing a joint product after the split-off point so long as the incremental _________ from such processing exceeds the incremental processing cost incurred after the split-off point.

revenue

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

vertical integration

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

constraint

Which ways calculate the benefit of selecting one alternative over the other?

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

When selecting one alternative over another, opportunity costs:

-are sometimes zero -represent foregone economic benefits

Which is an advantage of buying a part instead of making it?

Economies of scale can result in higher quality and lower costs from suppliers.

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

True

Mingling irrelevant and relevant costs may cause confusion and distract attention from critical information.

True

When deciding whether to take a train to visit a friend out of town, the monthly fee a student pays to park at school is not relevant to the decision.

True

When should a special order be accepted?

When the incremental revenue from the special order exceeds the incremental costs of the order.

A cost that can be eliminated in whole or in part by choosing one alternative over the other is a _________ cost.

avoidable

The first step in decision making is to:

define the alternatives

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

When considering decision alternatives, only relevant costs are included when using the

differential cost approach.

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

When a product is past the split-off point, but is yet not a finished product, it is called a _____________ product.

intermediate

The cost 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

Two or more products produced from a common input are known as _______________ products.

joint

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 _________ cost.

opportunity

The reduction in resale value of an asset through use or over time is called ____________ or __________depreciation.

real or economic depreciation

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

the total cost approach only.

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

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

Managers may choose to retain an unprofitable product line because it:

-helps sell other products -attracts customers

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

Which of the following should not be included in the analysis when making a decision? -avoidable costs -non-differential future costs -opportunity costs -sunk costs

-non-differential future costs -sunk costs

Depreciation of existing assets is a relevant to decisions.

False

Joint costs are:

irrelevant in decisions regarding what to do with a product after split-off

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

sunk

A company is currently 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?

-salvage value -alternative uses for the equipment

If some products must be cut back because of a constraint, produce the products with the highest

contribution margin per unit of constrained resource

A company must make a volume trade off decision when they

-must trade off units of one product with units of another due to limited production capacity -do not have enough capacity to satisfy the demand for all of its products

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

special order

What is the point in the manufacturing process at which joint products can be recognized as separate products?

split-off point

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 _____ or _____ decision.

make or buy