Accounting 2: Chapter 12 (exam 4)

Key Concept #4 Sunk costs are always irrelevant when choosing among alternatives. Key Concept #5 1) Future costs and benefits that do not differ between alternatives are _____ to the decision-making process.

1) irrelevant

Vertical Integration - Advantages 1) Smoother flow of parts and materials 2) Better quality ________ 3) Realize profits

control

What is the danger in allocating common fixed costs among products or other segments of an organization? 12-9 Allocations of common fixed costs can make a product (or other segment) appear to be unprofitable, whereas in fact it may be ______.

profitable

1) A special order is a ____-time order that is not considered part of the company's normal ongoing business. 2) When analyzing a special order, only the incremental costs and benefits are ____. 3) Since the existing fixed manufacturing overhead costs would not be affected by the order, they are ____ relevant.

1) one 2) relevant 3) not

Key Concept #6 •An opportunity cost is the potential ____ that is given up when one alternative is selected over another.

benefit

"All future costs are relevant in decision making." Do you agree? 12-6 No. Only those future costs that _____ between the alternatives are relevant.

differ

are variable costs always relevant costs? 12-3 No. Variable costs are relevant costs only if they _____ in total between the alternatives under consideration.

differ

Using the differential approach is desirable for two reasons: 1. Only rarely will enough information be available to prepare detailed income statements for ____ alternatives. 2. Mingling irrelevant costs with relevant costs may cause ____ and distract attention away from the information that is really critical.

1) both 2) confusion

1) When a limited resource of some type restricts the company's ability to satisfy demand, the company is said to have a ______ 2) The machine or process that is limiting overall output is called the ______ - it is the constraint.

1) constraint. 2) bottleneck

define the following terms: incremental cost, opportunity cost 12-2 1- An incremental cost (or benefit) is the change in _____ (or benefit) that will result from some proposed action. 2- An opportunity cost is the _____ that is lost or sacrificed when rejecting some course of action.

1) cost 2) benefit

Key Concept #3 1) The key to effective decision making is differential analysis—focusing on the future ____ and _____ that differ between the alternatives. 2) A future cost that differs between any two alternatives is known as a differential ____ 3) Future revenue that differs between any two alternatives is known as differential _____. 4) An incremental cost is an increase in ____ between two alternatives. 5) An avoidable cost is a cost that can be _____ by choosing one alternative over another.

1) costs; benefits 2) cost. 3) revenue 4) cost 5) eliminated

Sell or Process Further 1) Joint costs are ______ in decisions regarding what to do with a product from the split-off point forward. Therefore, these costs should not be allocated to end products for decision-making purposes. 2) With respect to sell or process further decisions, it is profitable to continue processing a joint product after the split-off point so long as the incremental revenue from such processing exceeds the incremental processing costs incurred after the split-off point.

1) irrelevant

Managing Constraints It is often possible for a manager to increase the capacity of a bottleneck, which is called relaxing (or elevating) the constraint, in numerous ways such as: 1. Working ______ on the bottleneck. 2. Subcontracting some of the processing that would be done at the bottleneck. 3. Investing in additional _____ at the bottleneck. 4. Shifting workers from non-bottleneck processes to the bottleneck. 5. Focusing business process improvement efforts on the bottleneck. 6. Reducing defective units processed through the bottleneck.

1) overtime 3) machines

1) In some industries, two or more products, known as joint products are produced from a single ______ material input. 2) The point in the manufacturing process where joint products can be recognized as a separate product is called the ____-____ point. 3) A decision as to whether a joint product should be sold at the split-off point or processed further is known as a sell or process ______ decision.

1) raw 2) split-off 3) further

Vertical Integration - Disadvantages 1) Companies may fail to take advantage of suppliers who can create economies of _______ advantage by pooling demand from numerous companies. 2) While the economics of scale factor can be appealing, a company must be careful to retain _____ over activities that are essential to maintaining its competitive position.

1) scale 2) control

Key Concept #1 1) Every decision involves choosing from among at least _____ alternatives. Therefore, the first step in decision-making is to define the alternatives being considered. Key Concept #2 2) Once you have defined the alternatives, you need to identify the criteria for choosing among them. - Relevant costs and relevant benefits _______ be considered when making decisions. - Irrelevant costs and irrelevant benefits should be ____ when making decisions.

1) two 2) should; ignored

Volume Trade-Off Decisions 1) Companies are forced to make _______ trade-off decisions when they do not have enough capacity to produce all of the products and sales volumes demanded by their customers. 2) In these situations, companies must trade off, or sacrifice production of some products in favor of others in an effort to ______ profits.

1) volume 2) maximize

When analyzing two alternatives which is NOT true? a) Isolating relevant costs gives a different answer than using all costs. b) Isolating relevant costs is called the differential cost approach. c) Mingling irrelevant costs with relevant costs may cause confusion and distract attention from the information that is critical.

answer: A)

The involvement by a company in more than one of the activities in the entire value chain from development through production, distribution, sales, and after-sales service is called ________. a) opportunity cost b) vertical integration c) relevant cost d) avoidable cost

answer: b) vertical integration

When a company does not have enough capacity to produce all of the products and sales volume demanded by their customers, this leads to ________. a) keep or drop decisions b) volume trade-off decisions c) sell or process further decisions d) make or buy decisions

answer: b) volume trade-off decisions

Which of the following types of decisions involves deciding whether to accept or reject an order that is outside the scope of normal sales? a) Make or buy b) Special order c) Sell or process further d) Keep or drop

answer: b) Special order

Which of the following is the second concept used in business decision making? a) Identify opportunity costs. b) Perform differential analysis. c) Distinguish between relevant and irrelevant costs and benefits. d) Define the alternatives.

answer: c) Distinguish between relevant and irrelevant costs and benefits.

"Variable costs and differential costs are the same thing." Do you agree? 12-5 No. A variable cost is a cost that varies in total amount in direct proportion to changes in the level of activity. A differential cost is the difference in cost between two alternatives. If the level of activity is the same for the two alternatives, a variable cost will not be affected and it will be _____

irrelevant.

"if a product is generating a loss, then should it be discontinued." Do you agree? 12-8 Not necessarily. An apparent loss may be the result of allocated common costs or of sunk costs that cannot be avoided if the product is dropped. A product should be discontinued only if the contribution margin that will be lost as a result of dropping the product is ________ than the fixed costs that would be avoided. Even in that situation the product may be retained if it promotes the sale of other products.

less

Prentice Company is considering dropping one of its product lines. What costs of the product line would be relevant to this decision? What costs would be irrelevant? 12-7 Only those costs that would be avoided as a result of dropping the product line are _____ in the decision. Costs that will not be affected by the decision are ______

relevant; irrelevant.

When a company is involved in more than one activity in the entire value chain, it is ______ integrated. 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 buy" decision.

vertically make