Managerial Accounting LearnSmart Chapter 12

Average costs:

contain sunk costs, are often misleading

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

An increase in cost between alternatives is a(n) ____ cost

incremental

The present trend appears to be towards ___ vertical integration

less

Differential costs and benefits that should be considered in a decision

may be qualitative or quantitative

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

a one-time order that is not considered part of the company's normal ongoing business is a ___ order

special

a cost that has already been incurred and that cannot be avoided regardless of what a manager decides to do is referred to as a(n) ___ cost

sunk

When making a decision, only relevant items are included in the analysis of the alternatives when using:

the differential cost approach only

when making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative income statements.

true

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

bottleneck

Average costs

are often misleading contain sunk costs

A joint produced should be processed after split-off if the

incremental revenue after split-off exceeds the incremental processing cost after split-off

When a product is past the split-off point, but is not yet a finished product, it is called a(n) ____ product

intermediate

When considering decision alternatives, both relevant and irrelevant costs are included when using the ___ ___ approach

total cost

Ways to increase the capacity of a bottleneck

investing in additional machines at the bottleneck shifting workers from processes that are not bottlenecks to the process that is the bottleneck

When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of a ______ cost.

avoidable, incremental

If a company has a resource that could be used for something else, the ___ cost is the profit that could be derived from the best alternative use of the resource

opportunity

joint costs incurred prior to the split-off point __ relevant in decisions regarding what to do from the split-off point forward.

are not

Allocated common costs

only relevant to decisions if they are avoidable

The machine or process that is limiting overall output is called a

bottleneck/constraint

Goodstone Tire Corporation sells tires for $100 each. Per unit costs associated with producing and selling the tires are: Direct Materials $35 Direct Labor $10 Factory Overhead $20 Selling and Administrative $15 The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 10,000 tires for $70 each. The order would not require any selling or administrative costs. The purchaser will pay the shipping costs, but Goodstone will have to pay a $100,000 inspection fee in order to be able to make the foreign sale. Accepting the special order will not affect current sales or production. What effect would accepting the special order have on Goodstone's net operating income?

$70,000 increase The revenue per tire is $70 and the cost is $63 (direct materials, direct labor, variable overhead and inspection fee of $10 ($100,000/10,000) tires) so each tire will generate $7 in net operating income.

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.

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. The relevant manufacturing costs for the part is $15 per unit. If the company decides to purchase the part, the space now being used can be used to produce another product that will generate a segment margin of $80,000 per year. Should Andrews continue to make or should they buy the part?

Buy -- $20,000 advantage [The total buy price = 20,000 x $18 or $360,000. The cost to make equals (20,000 x $15) + $80,000 forgone opportunity or 380,000. Thus, there is a $20,000 advantage to buying the part.]

Which of the following should not be included in the analysis when making a decision?

Non-differential future costs. Sunk costs.

When should a special order be accepted?

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

A company is considering buying a component part that they currently make. Which of the following items related to equipment currently being used to make the component are relevant to the decision?

salvage value alternative uses for the equipment

Deciding what to do with a joint product at a split-off point is a ___

sell or process further decision

Deciding what to do with a joint product at the split-off point is a:

sell or process further decision

Activities ranging from development to production to after-sales service are called a(n) ___ ___

value chain

When a company is involved in more than one activity in the entire value chain, it is ___ ___

vertically integrated

The cost provided by a well-designed activity-based costing system are ___ relevant to a decision

potentially

The reduction in resale value of an asset through use or over time is called ___ or ___ depreciation

real, economic

Potential advantages of dropping a product line or other segment include:

an overall increase in net operating income and avoiding more fixed costs than the company loses in contribution margin.

Anything that prevents you from getting more of what you want is a(n) ___

constraint

When a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a(n) ___

constraint

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

contribution margin per unit of constrained resource

When a constraint exists, companies need to focus on maximizing

contribution margin per unit of constraint

Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time and 5 minutes of labor time. If the company's constraint is labor hours, the contribution margin per unit of constraint for Product XYZ is $__ per minute

$3 CM of $15 / 5 minutes of labor = $3 per minute

ABC Lumber spent $1,000 cutting down a tree. The result was 40 unfinished logs that sell for $20.00each and 100 bags of sawdust that sell for $1.00 each. If the unfinished logs are processed into finishedlumber at a cost of $8.00 each, they will sell for $35.00. A bag of sawdust can be processed into PrestoLogs that sell for $1.25 at a cost of $0.75 per bag. Which of the following statements are true concerningwhether the logs should be processed into finished lumber and whether the sawdust should beprocessed into Presto Logs?

- The sawdust should be sold as is without being processed into PrestoLogs. - The pieces of unfinished lumber should be processed

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

-an analysis that just looks a the relevant costs and benefits. -the difference between the net operating income for the two alternatives -an analysis that looks at all costs and benefits and identifies those that are differential.

Which of the following may be an advantage of making a part rather than buying it?

-less dependence on outside suppliers -a smoother flow of parts and materials for production

Product DGH has a monthly demand of 5,000 units. Its contribution margin is $18 per unit and $36 per direct labor hour. Product RBG has a monthly demand of 4,000 units. It's contribution margin is $15 per unit and $60 per direct labor hour. If the company only has 1,500 direct labor hours available, the company should produce _________ units of Product DGH and ______ units of Product RBG.

1,000 The remaining 500 hours can be used to make 1,000 units of DGH (36/18 = 2 units per hour X 500 hours left of the 1,500 4,000 RBG has the highest CM per hour and requires 1,000 hours to meet demand. (60/15 = 4) 4,000/4 = 1,000 1,500-1,000 = 500

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrew's per unit manufacturing cost for 20,000 units is: Cost :Variable manufacturing per unit $12 = $240,000 Supervisor salary per unit $3 = $60,000 Depreciation per unit $1 = $20,000 Allocated fixed OH per unit $7 = $140,000 If the part is purchased, the supervisor position would be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. Should the company buy the part or continue?

Continue to make -- $60,000 advantage[The avoidable costs of making the product are the variable costs plus the supervisor salary or $15 per unit. The total savings is $60,000 ($18 buy price - $12 variable cost - $3 supervisor salary = $3 advantage to make * 20,000 units).

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

When considering decision alternatives, only relevant costs are included when using the ___ ____ approach

differential cost

Which of the following is an advantage of buying a part instead of making it?

economies of scale can result in higher quality and lower costs from suppliers

Managers may choose to retain an unprofitable product line because it

helps sell other products attracts customers

To maximize total contribution margin when a constrained resource exists, produce the products with the:

highest contribution margin per unit of the constrained resource

To effectively deal with a constraint:

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

When there is a constrained resource, the best way to increase profits is to

increase the capacity of the bottleneck

The split-off point is the point in the manufacturing process at which the __________ products can be recognized as separate products.

joint

the costs incurred up to the split-off point in a process in which two or more products are produced from a common input are know as __ costs.

joint

Two or more products produced from a common input are:

joint products

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 company must make a volume trade-off decision when they

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

T/F: Depreciation of existing assets is relevant to decisions

False Depreciation spreads sunk costs across the life of the assets and is not relevant

T/F: Some decisions only have one alternative

False Every decision involves choosing from at least two alternatives, even if the alternatives are yes or no

focusing on future costs and benefits that are not the same between alternatives.

differential analysis

Costs and benefits should be ignored when making decisions are called ____ costs and benefits

irrelevant

Joint costs are:

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

In deciding whether to drive to a location or take the train, the relaxation factor that comes from not having to drive ___ relevant to the decision

is