Cost Management Systems - Chp 12

It is always clear which activities add value and which do not add value to a product.

False; Activities do not always fall neatly into value-added or nonvalue-added categories.

Cost bases that include fewer costs also have lower markups.

False; Cost bases that include fewer costs have higher markups.

For manufacturing firms, product costs are generally locked in during the manufacturing stage.

False; For manufacturing firms, product costs are generally locked in during the design stage.

In cost-plus pricing, the markup is a rigid number that determines the actual selling price.

False; In cost-plus pricing, the markup is ultimately determined by the market.

In markets with little or no competition, the key factor affecting price is costs, not customers' willingness to pay or competitors.

False; In markets with little or no competition, the key factor affecting price is the customers' willingness to pay, not costs or competitors.

Locked-in costs have already been incurred.

False; Locked-in costs are those costs that have not yet been incurred, but which, based on decisions that have already been made, will be incurred in the future.

Price discrimination is the illegal practice of charging some customers a higher price than is charged to other customers.

False; Price discrimination is a legal practice of charging some customers a higher price than is charged to other customers.

Price dumping occurs when a domestic company is trying to get rid of out-of-style products at a substantially reduced price.

False; Price dumping occurs when a non-U.S. company sells a product in the United States at a price below the market value where it is produced and this action threatens to injure an industry in the United States.

Profit margins are often set to earn a reasonable return on investment for short-term pricing decisions, but not long-term pricing decisions.

False; Profit margins are often set to earn a reasonable return on investment for long-term pricing decisions, but not short-term pricing decision.

Relevant costs for pricing decisions include manufacturing costs, but not costs from other value-chain functions.

False; Relevant costs for pricing decisions include costs from all value-chain functions, from R&D to customer service.

Relevant costs of a bidding decision should exclude revenues lost on lower-priced sales to existing customers.

False; Relevant costs of a bidding decision should include revenues lost on lower-priced sales to existing customers.

Rework is an example of a value-added cost.

False; Rework is an example of a nonvalue-added cost.

Target pricing is a form of cost-based pricing.

False; Target pricing is a form of market-based pricing.

The first step in target pricing is to determine the target cost of the product.

False; The first step in target pricing is to determine the target price of the product.

The target rate of return on investment is another way of referring to the markup percentage.

False; The target rate of return on investment and the markup percentage are two different things.

When demand is elastic, an increase in price will lead to an increase in profits.

False; When demand is inelastic, an increase in price will usually lead to an increase in profits.

When prices are set in a competitive marketplace, product costs are the most important influence on pricing decisions.

False; When prices are set in a competitive marketplace, companies have no control over setting prices and must accept the price determined by the market.

A business that engages in predatory pricing violates various U.S. antitrust laws.

True

A full-cost base rather than a variable-cost base is a better guide for discounting decisions that may affect long-term customers.

True

Collusive pricing occurs when companies in an industry conspire in their pricing and output decisions to achieve a price above the competitive price.

True

Companies must always examine pricing decisions through the eyes of their customers.

True

Cost information only helps the company decide how many units to produce.

True

Costs may be locked in before they are incurred.

True

Customer life-cycle costs focus on total costs incurred by the customer from purchase to disposal.

True

Customers prefer stable and predictable prices over a long time horizon.

True

In a one-time-only special order, existing fixed manufacturing costs are irrelevant.

True

Kaizen costing focuses on improving productivity and eliminating waste through continuous improvements.

True

Life-cycle budgeting is particularly important when nonproduction costs are significant.

True

Many companies use life-cycle budgeting to determine target prices.

True

Markups tend to be lower in more competitive markets.

True

One goal of target costing is to design costs out of products.

True

Price discrimination is only illegal if the intent is to destroy competition.

True

Price discrimination laws apply only to manufacturers.

True

Product cost analysis is important even if market forces set prices.

True

Short-run pricing decisions include adjusting product mix in a competitive environment.

True

Spending more on the design phase of a new product usually reduces subsequent product-related costs.

True

Suppliers play a key role in the success of target costing.

True

The full-cost formula for pricing is relatively simple to use because it does not require a detailed analysis of cost behavior.

True

To be profitable, a company must generate revenues to cover costs incurred in all six business functions.

True

Value engineering has the objective of reducing costs while still satisfying customer needs.

True

Value engineering seeks to reduce value-added costs as well as nonvalue-added costs.

True

When demand is strong, firms usually increase markups.

True

When price discrimination is effective, cost is not a major factor in setting prices.

True