Acct 201B Chapter 11
advantages of dropping a product line or segment
- decrease in fixed costs (salarie or advertising) more than losses in contribution margin - increase in net
Isolating relevant costs is desirable because ______.
-Critical information may be overlooked with the total cost approach -All information needed for the total cost approach is rarely available - Irrelevant costs may be used incorrectly in the analysis
T/F: accounting depreciation of an existing asset is relevant to decisions
False, depreciation spreads sunk which is not relevant
make or buy decision
a decision concerning whether an item should be produced internally or purchased from an outside supplier
Advantage of vertical integration
being less dependent on suppliers realizing the
when dealing with a constrained resource managers should focus their attention on managing the
bottleneck
make or buy equation
buy price - variable cost - position eliminated = advantage/disadvantage x units (negative buy the part, positive make the part)
danger in allocating common fixed costs
can make a product line look less profitable than it really is
If some products must be cut back because of a constraint, produce the products with the highest:
contribution margin per unit of the constrained resource
When a constraint exists, companies need to focus on maximizing ______.
contribution margin per unit of the constraint
First step in decision making process
define the alternatives being considered
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
when there is a constrained resource the best way to increase profits is to
increase the capacity of the bottleneck
synonyms for differential costs
incremental avoidable cost
Future costs and benefits that do not differ between alternatives are ______ costs to the decision-making process.
irrelevant
cost of car insurance and drivers lincesne
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 road trip, the ____ is a sunk cost and should be ignored
original cost do the car
When a manager increases the capacity of the bottleneck, it is called:
relaxing (or elevating) the constraint
cost of maintenance and repairs
relevant
costs and benefits that always differ between alternatives are
relevant
only ____ costs and benefits should 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 sale that is not considered a part of the company's normal ongoing business is referred to as a _______ ___________ decision.
special order
Costs that have already been incurred and can not be changed by decisions made in the current period or in the future periods are called __________ costs.
sunk
Irrelevant costs include:
sunk costs and future costs that do not differ between alternatives
to maximize total contribution margin when a constrained resource exists, produce the products with the
the highest contribution margin per unit of the constrained resource
if a company is using a resource that could be used for some other purpose the opportunity cost of that resource is
the profit from the best alternative use of the resource
opportunity costs are not usually found in accounting records but they are considered in every decision a manager makes
true
when demand for product exceeds the production capacity
volume trade off decision
idle space being used would have an opportunity cost of
zero