ACCT208

Factors in determining the markup percentage using the absorption costing approach to cost plus pricing include

Absorption costing unit product cost selling, general and adminsistrative expenses adequate return on investment

The manufacturing cycle effiency is computed by relating the value added time to the ________ time

throughput time

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

potentially

The absorption costing approach to cost plus pricing

relies on forecasted unit sales assumes that customers will pay whatever price the company decides to charge

The formula used to calculate markup percentage on absorption cost includes

selling, general and administrative expenses unit product costs multiplied by unit sales required ROI multiplied by investment

Which evaluation measures are used for investment center managers only--- not for cost or profit center managers

Residual Income and Return on Investment

Deciding what to do with a joint product at the split off point is a _______ or ____ decision

Sell or Process Further Decision

Why is the unit product cost different from the cost that would be incurred if another (additional_ unit were produced?

The cost to produce another unit is the incremental or marginal cost

Joint Costs

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

Price elasticity of demand

The degree to which a change in price affects unit sales of a product or service

The Target costing approach was developed because

The market really determines prices Most of a product's cost is determined in the design stage

Residual Income

The net operating income that an investment center earns above the minimum required return on its average operating assets

Economic Value to the Customer

The price of a customer's best available alternative plus the value of what differentiates the product from that alternative

Target Costing

The process of determining the maximum allowable cost for a product and developing a profitable prototype

When there is a constrained resources such as time

The product that has the greater contribution margin per minute should be produced first to meet customer demand and then any remaning capacity should be used to produce the secondary product

When all overhead is assigned using direct-labor hours, the company has chosen to use

a plantwide predetermined overhead rate

Absorption Costing

all manufacturing costs, both fixed and variable are assigned to units of products conversely all non manufacturing costs are treated as period costs and not assigned to units of products

The formula to calculate the target cost includes

anticipated selling price desired profit per unit

Total Manufacturing costs is caluculated using

applied, not actual overhead

Profit Center Managers

are often evaluated on actual vs budgeted net income

Customers and Competitors play important roles in determining a company's price

ceiling

Martin Industries had unadjusted cost of goods sold of $450,000. Overhead was underapplied by $30,000. Adjusted cost of goods sold is

480,000

Differential Cost

Also known as an incremental or Avoidable cost A future cost that is not the same between any two alternatives

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?

Alternative uses for the equipment & salvage value NOT depreciation which is a sunk cost

Why do companies use a predetermined overhead rate rather than an actual overhead rate?

An actual overhead rate is not known until the end of the period

Balanced Scorecard

An integrated set of performance measures that are derived from the company's strategy

Target Cost

Anticipated selling price - Desired Profit

Cost Plus Pricing

Applying a predetermined markup percentage to a cost base to determine the selling price

To calculate cost of goods manufactured

Beginning work in process + Total manufacturing costs - Work In Process

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

Contribution margin per unit of constrained resource

Value Added Time

Process Time

Throughput or Manufacturing Cycle Time

Process Time + Inspection Time + Move time + Queue Time

Steps of decision making

Define the alternatives Identify relevant costs and benefits Perform a differential analysis

At Breakeven total contribution margin is

Equal to fixed costs

Value Based Pricing

Establishing selling prices based on the economic worth of benefits their goods and services provide to customers

Four groups of performance measures typically used in the balanced scorecard approach

Financial, customer, internal business processes, and learning and growth

Pricing all a company's products above the price floor does not guarantee a profit because all ____ costs may not be covered

Fixed Costs

Costs and benefits that ALWAYS differ between alternatives

Relevant Costs and Benefits

Elastic Demand

If price changes significantly impact product sales

Inelastic Demand

If the change in price does not greatly impact sales

Using net book value (instead of gross cost) to calculate average operating assets

Increases ROI over time

The manager of an ________ center has control over costs, revenue, and investments in operating assets

Investment Center

Isolating relevant costs is desirable because

Irrelevant costs may be used incorrectly in the analysis All information needed for the total cost approach is rarely available Critical information may be overlooked with the total cost approach

Joint costs are

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

Value Based Price

Is less than the EVC which = reference value + diffrential value Greater than or equal to the reference value

Disadvantage of Residual Income approach

It cannot be used to compare the performance of divisions of different sizes

When is it profitable to continue processing a joint product after the split off point?

It is profitable when the incremental revenue exceeds the incremental processing cost

ROI Formula

Margin x Turnover (Net Operating Income / Sales ) x (Sales / Average Operating Assets)

Steps in the absorption costing approach are

Multiply unit product costs by 1+ markup percentage Calculate unit product costs Determine markup percentage on absorption cost

Residual INcome

Net operating income - ( average operating assets x minimum required rate of return)

When a manager is evaluated on Residual Income, an investment is acceptable when

Net operating income for the investment is above the minimum required return on average operating assets

Joint Products

Two or more products produced from a common input

Total cost approach

Uses both relevant and irrelevant costs when using this decision making approach

Manufacturing Cycle Efficiency (MCE)

Value added time "Process Time" / Throughput Time Process Time / (Process Time + Move Time + Queue Time + INspection Time)

Non Value Added Time

Wait Time Inspection Time Move Time Queue Time

Delivery Cycle Time

Wait Time + Throughput Time = Wait Time + Process Time + Inspection Time + Move Time

Markup Percentage Formula on absorption costing

[(Required ROI x Investment) / Selling and administrative Expenses ] / (unit product cost x unit sales)

Lower level management goals that are inconsistent with company goals are a possible disadvantage of

decentralization

To effectively deal with a constraint

efforts should be focused on the weakest link improvements should focus on the constraint

Predetermined overhead rate is calculated by

estimated total manufacturing overhead / estimated total amount of the allocation base

The lowest price a company can charge and still make incremental profits on the sale is the price ____

floor

Irrelevant Costs

future costs that do not differ between alternatives sunk costs

Relevant costs when analyzing a special order

incremental costs and benefits only since the existing fixed manufacturing overhead costs would not be affected by the order, they are not relevant

When in a Make or Buy Decision the cost incureed to buy the equipment to make the part

is a sunk cost; the depreciation simply spreads this sunk cost over the equipment's useful life

Shortcoming of allocating common fixed costs

is that such allocations can make a product line look less profitable than it really is