ACC 208 Chapter 6 SB

The total cost approach and the differential approach methods of decision analysis ______ provide the same correct answer. may or may not will always will never

Will always

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(n) ______ cost. sunk irrelevant avoidable incremental

Avoidable, incremental

A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n) ______ cost. incremental irrelevant sunk avoidable

Avoidable

Synonyms for differential costs include ______ cost. avoidable incremental irrelevant sunk

Avoidable, incremental

Potential advantages of dropping a product line or other segment include: avoiding more fixed costs than the company loses in contribution margin an overall increase in net operating income an overall decrease in other product line sales increasing relevant costs that the company incurs

Avoiding more fixed costs than the company loses in CM, an overall increase in net operating income

Focusing on future costs and benefits that are not the same between alternatives is: irrelevant cost analysis defining the alternatives differential analysis the total cost approach

Differential analysis

The key to effective decision making is: considering opportunity costs knowing there are at least two alternatives differential analysis

Differential analysis

True or false: Depreciation of existing assets is relevant to decisions. True False

False

True or false: Opportunity costs are not found in accounting records because they are not relevant to decisions. True False

False

Costs and benefits that should be ignored when making decisions are called ______ costs and benefits. incremental opportunity relevant irrelevant differential

Irrelevant

Future costs and benefits that do not differ between alternatives are ______ costs to the decision-making process. opportunity sunk relevant irrelevant

Irrelevant

Costs and benefits that always differ between alternatives are ______ costs and benefits. irrelevant variable relevant sunk

Relevant

Differential revenue is an example of a(n) ______ benefit. relevant irrelevant sunk avoidable

Relevant

When planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a(n) _________ cost. Opportunity Relevant Irrelevant Sunk

Relevant

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

Sunk

Costs that have no impact on future cash flows and are irrelevant to decisions are _____ costs. avoidable marginal unavoidable sunk

Sunk

True or false: Some decisions only have one alternative. True False

False

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

If, by dropping a product line, a company cannot avoid as much in fixed costs as it loses in contribution margin, the company should _____ the product line. keep drop

Keep

When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative ____ ____

Income, statements

Stephens, Inc. is considering dropping a product line. During the prior year, the line had sales of $170,000, variable costs of $86,000 and total fixed expenses of $110,000. Of the fixed expenses, $95,000 are avoidable. If Stephens drops the product line, net operating income will: increase by $9,000 increase by $26,000 decrease by $60,000 increase by $11,000

Increase by $11,000. The company will lose $84,000 in CM ($170,000-$86,000). If $95,000 of the fixed costs are avoidable, net income will increase by $11,000.

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 monthly parking fee that must be paid at your apartment while you are gone cost of gasoline for the trip cost of car repairs and maintenance

Original cost of the car

Which of the following are ways in which to calculate the benefit of selecting one alternative over another? An analysis that looks at just the sunk costs of each of the two alternatives. The difference between the net operating income for the two alternatives. An analysis that just looks at the relevant costs and benefits. An analysis that looks at all costs and benefits and identifies those that are differential.

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

When making a decision, irrelevant items are included in the analysis of both alternatives when using: the total cost approach only both the differential and total cost approaches the differential cost approach only neither the differential nor total cost approach

The total cost approach only

Which of the following can make a product line look less profitable than it really is? Allocated common fixed costs Common variable costs

Allocated common fixed costs

Average costs: contain sunk costs are differential costs are often misleading should be the basis for decision making

Contain sunk costs, are often misleading

A cost that can be eliminated by choosing one alternative over another is a(n) ____ cost

Avoidable

The first step in decision making is to: identify relevant costs and benefits perform a differential analysis define the alternatives

Define the alternatives

A future cost that is not the same between any two alternatives is known as a(n) ____ , incremental, or avoidable cost.

Differential

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

Incremental

The potential benefit given up when selecting one alternative over another is a(n) ________ cost. avoidable sunk irrelevant opportunity

Opportunity

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

Total, Cost

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 managers prefer to see all costs and benefits associated with a decision

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

A business segment should only be dropped if a company can save more in ______ costs than it loses in contribution margin. fixed mixed variable product

Fixed

Which of the following should not be included in the analysis when making a decision? Avoidable costs Opportunity costs Non-differential future costs Sunk costs

Non-differential future costs, sunk costs

True or false: Mingling irrelevant and relevant costs may cause confusion and distract attention from critical information. True False

True

True or false: When deciding whether to take a train or drive for a weekend trip to visit an out-of-town friend, the monthly fee a student pays to park at school is not relevant to the decision. True False

True