pre-ch 11 Differential Analysis: The Key to Decision Making

Isolating relevant costs is desirable because ________.

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

Irrelevant costs include________.

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

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

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

-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.

Which of the following are synonyms for differential cost? (Check all that apply)

-Incremental cost -Avoidable cost

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

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

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

never

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

avoidable

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

bottleneck

Which of the following are ways to increase the capacity of a bottleneck?

-Investing in additional machines as the bottleneck -Shifting workers from process that are bottlenecks to the process that is the bottleneck

When considering accepting a special order, ________

-Normal sales must not be affected -There must be idle capacity

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

Constraint

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

False (They ARE relevant to decisions)

Abba Inc, is considering dropping a product line. During the prior year, the line had sales of $207,000 and a contribution margin of $124,000. Fixed expenses consist of: Salaries $60,000 Rent $50,000 Advertising $20,000 Administrative $35,000 Total Fixed Expenses $165,000 The product line manager's $60,000 salary is avoidable as is the $20,000 of advertising. Of the administrative expenses, $10,000 is avoidable. The rest are general allocated expenses that will not change if the product is dropped. The rent expense is allocated to product lines based on sales and represents a share of the total cost for the building. If this product line is dropped, what will happen to the company's overall net income?

Overall net income will decrease by $34,000. The company will lose the $124,000 contribution margin. Only $90,000 of the fixed costs (salary, advertising, and $10,000 of administrative) are avoidable, so net income will decrease by $34,000.

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

Sell or Process Further

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

incremental

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

irrelevant

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

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

isolate relevant costs from irrelevant costs

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, buy

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

special order

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

To effectively deal with a constraint ________.

- Improvements should focus on the constraint - Efforts should be focused on the weakest link

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

-Do not have enough capacity to satisfy the demand for all its products -Must trade of units of one product for units of another due to limited production capacity

When shoal a special order be accepted?

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

when a constraint exists, companies need to focus on maximizing

contribution margin per unit of constraint

The first step in decision making is to:

define the alternative

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

differential cost

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

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

fixed

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

The cost provided by a well-design activity-based costing system are _______ relevant to a decision.

potentially

It is profitable to container procession 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

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

zero