Managerial Accounting Chapter 13

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

False

True or false: Some decisions only have one alternative.

False

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

Fixed costs

When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of a(n) ______ cost.

Incremental; avoidable

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

Intermediate

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

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

Irrelevant

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

Irrelevant

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

Isolate relevant costs from irrelevant costs

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

Original cost of the car

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?

Salvage value; alternative uses for the equipment

Deciding what to do with a joint product at the split-off point is a ______ decision.

Sell or process further

The point in the manufacturing process at which joint products can be recognized as separate products is called the ______ point.

Split-off

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

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

Sunk costs; non-differential future costs

To maximize total contribution margin when a constrained resource exists, produce the products with the ______.

Highest contribution margin per unit of the constrained resource

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

Sunk

Irrelevant costs include ______.

Sunk costs. Future costs that do not differ between alternatives.

Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time and 10 minutes of labor time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time and 5 minutes of labor time. If the company's constraint is labor hours, the contribution margin per unit of constraint for Product XYZ is $______ per minute.

$3 CM of $15/5 mins of labor time= $3 per minute

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

Less dependence on outside suppliers; a smoother flow of parts and materials for production

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

Profits

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

Opportunity

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

Joint products

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

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

Sell; process further

A one-time order that is not considered part of the company's normal ongoing business is called 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/specialty order

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

Zero

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

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

Make or buy

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

May or may not be an avoidable cost of the segment

Joint costs incurred prior to the split-off point are ______ relevant in decisions regarding what to do from the split-off point forward.

Never

Synonyms for differential costs include ______ cost.

Incremental; avoidable

Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time. If the company's constraint is machine hours, to maximize profit, they should first fill the demand for Product ______.

ABC The company should fill the demand for the product with the highest CM per unit of the constrained resource. ABC's is $2 per minute of machine time (CM of $10 ÷ 5 minutes) while XYZ's is only $1.50 per minute of machine time (CM of $15 ÷ 10 minutes).

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. Must trade off units of one product for units of another due to limited production capacity.

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 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

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 $6.75 per bottle which is expected to decrease sales by 5%. If the price is raised profits are expected to ______ (increase/decrease) by $______ per year.

Increase; $9,375 Profit = (P - V) x Q - Fixed expenses = (6.50 - 3.00) x 150,000 - 350,000 = 3.50 x 150,000 - 350,000 = 525,000 - 350,000 = $175,000 Profit = (P - V) x Q - Fixed expenses = (6.75 - 3.00) x 142,500 - 350,000 = 3.75 x 142,500 - 350,000 = 534,375 - 350,000 = $184,375 $184,375 - $175,000 = $9,375

Costs incurred up to the split-off point in a process in which two or more products are produced from a common input are called ______ costs.

Joint

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

The split-off point is the point in the manufacturing process at which the ______ products can be recognized as separate products.

Joint

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

Joint

If, by dropping a product line, a company cannot avoid as much in fixed costs as it loses in contribution margin, the company should ______ the product line.

Keep

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

Potentially

Which of the following involves increasing the capacity of a bottleneck?

Relaxing the constraint

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

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

The machine or process that is limiting overall output is a(n) ______.

Bottleneck

When deciding whether to fly or take the train on a trip, the cost of putting your pet in a boarding facility while you are away is a(n) ______ cost.

Irrelevant

Joint costs are ______.

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

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

False

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

Opportunity/relevant

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

Avoidable/relevant

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

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.

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

Bottleneck

The machine or process that is limiting overall output is called a(n) ______.

Bottleneck/constraint

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 profits are expected to ______ (increase/decrease) by $______ per year.

Decrease; $45,000 Profit = (P - V) x Q - Fixed expenses = (6.50 - 3.00) x 150,000 - 350,000 = 3.50 x 150,000 - 350,000 = 525,000 - 350,000 = $175,000 Profit = (P - V) x Q - Fixed expenses = (7.00 - 3.00) x 120,000 - 350,000 = 4 x 120,000 - 350,000 = 480,000 - 350,000 = $130,000 $175,000 - $130,000 = $45,000

The first step in decision making is to ______.

Define the alternatives

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

Vertical integration

When demand for products exceeds the production capacity, a(n) ______ ______-______ decision must be made.

Volume trade-off

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

Constraint/bottleneck

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 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).

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

Contribution margin per unit of constrained resource

When a constraint exists, companies need to focus on maximizing ______.

Contribution margin per unit of constraint