ACC
What are advantages of making a part rather than buying it?
- A smoother flow of pats and materials for production - Less dependence on outside suppliers
Average costs:
- Are often misleading - Contain sunk costs
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
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 product for units of another due to limited production capacity
How do you effectively deal with a constraint?
- Efforts should be focused on the weakest link - Improvements should focus on the constraint
Avoidable Cost
A cost that can be eliminated by choosing one alternative over another.
Sunk Cost
A cost that has already been incurred and cannot be avoided regardless of what the manager decides to do.
Make or Buy Decision
A decision to carry out one of the activities in the value chain internally rather than to buy externally from a supplier.
Special Order
A one- time order that is NOT considered part of the company's normal ongoing business.
Value Chain
A set of activities ranging from development to production to after- sales service
Constraint
Anything that prevents you from getting more of what you want.
Joint costs incurred prior to the split- off point _____ relevant in decisions regarding what to do from the split- off point forward.
Are not
Synonyms for DIFFERENTIAL costs are _______.
Avoidable and incremental
When a manager increases the capacity of a constraint or ______, it is called relaxing the constraint.
Bottleneck
When dealing with a constrained resource, managers should focus their attention on managing the:
Bottleneck
Product ABC has a contribution margin per unit of $10. Each unit of ABC requires 5 minute of machine time and 10 minutes of labor time. Product XYZ has a contribution margin per unit of $15 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 $_____.
CM of $15 / 5 minutes of labor time = $3 per minute
Sell or Process Further Decision
Deciding what to do with a joint product at the split- off point.
What is the first step in decision making?
Define the alternatives
The key to effective decision making is:
Differential Analysis
True or False: Opportunity costs are NOT found in accounting records because they are not relevant to decisions.
False
A business segment should only be dropped if a company can save more in _____ costs than it loses in contribution margin.
Fixed
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
When making a volume- trade off decision, managers should ignore:
Fixed costs
To maximize total contribution margin when a constrained resource exists, produce the products with the:
Highest contribution margin per unit of the constrained resource
Future costs and benefits that do not different between alternatives are _____________ costs to the decision- making process.
Irrelevant
Total Cost Approach
Irrelevant items are included in the analysis of both alternatives
Space being used that would otherwise be idle has an _______ cost of zero.
Opportunity
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.
Split- off Point
The point in the manufacturing process at which the joint products can be recognized as separate products.
Real or Economic Depreciation
The reduction in resale value of an asset through use or over time
Joint Products
Two or more products that are produced from a common input.
Being less dependent on suppliers and making profits on both parts and the final product are advantages of _________.
Vertical Integration
Vertically integrated
When a company is involved in more than one activity in the entire value chain.
Intermediate Product
When a product is past the split- off point, but is not yet a finished product
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 trip to decide whether to drive or fly, the _____ is a sunk cost and should be ignored.
Original cost of the car
The costs provided by a well- designed activity- based costing system are _____ relevant to a decision.
Potentially
Effectively managing an organization's constraints is key to increase:
Profits
When making a decision only ______ costs and benefits should be included in the analysis.
Relevant
When planning a trip and deciding to drive your car or take the train, gasoline is a ____ cost.
Relevant
It is profitable to continue processing a joint product after the split- off point, so long as the incremental ______ from such processing exceeds the incremental processing cost incurred after the split- off point.
Revenue
To increase the strength of a chain, efforts should be concentrated on strengthening:
The weakest link
Differential Cost Approach
When considering decision alternatives, only relevant costs are included
Mangers may choose to retain an unprofitable product line because it:
- Helps sell other products - Attracts customers
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
Which of the following should NOT be included in the analysis when making a decision? - Sunk Costs - Opportunity Costs - Avoidable Costs - Non- differential Future Costs
-Sunk Costs - Non- differential Future Costs
How should a bottleneck be managed?
- Focus business process improvement efforts on the bottleneck - Ensure there is minimal lost time at the bottleneck due to breakdowns and set- ups - Find ways to increase the capacity of the bottleneck
The capacity of a bottleneck can be effectively increased by:
- Focusing business process improvement efforts on the bottleneck - Subcontracting some of the processing that would be done in that area
When considering accepting a special order:
- Normal sales must not be affected - There must be idle capacity
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?
- Salvage Value - Alternative uses for the equipment
Volume Trade- off
When demand for products exceeds the production capacity
