Accounting Chapter 6
True or false: Depreciation of existing assets is relevant to decisions. True false question.
False; Depreciation is a sunk cost
When making a volume-trade off decision, managers should ignore: Multiple choice question.
fixed costs
Costs and benefits that should be ignored when making decisions are called ______ costs and benefits.
irelevant
Indirect fixed costs arise because of the overall operation of the company. Do not disappear if segment is eliminated.
Common (shared) fixed costs
True or false: Opportunity costs are not found in accounting records because they are not relevant to decisions.
False ; Opportunity costs are relevant to decisions.
An action that increases the amount of a constrained resource. Equivalently, an action that increases the capacity of the bottleneck
Relaxing (or elevating) the constraint
A cost that can be eliminated by choosing one alternative over another is a(n)
avoidable or relevant
A machine or some other part of a process that limits the total output of the entire system.
bottleneck
First step in decision making
define the alternatives being considered
A future cost that is not the same between any two alternatives is known as a(n) _______, incremental, or avoidable cost.
differential
Focusing on future costs and benefits that are not the same between alternatives is:
differential analysis
The key to effective decision making is:
differential analysis
Segment (cost object) determines
if a cost is traceable (direct) or common (indirect)
When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative
income statements
An increase in cost between two alternatives is a(n)
incremental cost
An increase in cost between two alternatives.
incremental cost
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.
relevant (Car repairs and maintenance are related to usage, so driving for a trip will impact the need for repairs and maintenance.)
A benefit that should be considered when making decisions.
relevant benefit
When planning a trip and deciding to drive your car or take the train, gasoline is a(n)
relevant cost
Contribution margin is the best gauge of ____ profitability
short term
When making a decision, qualitative differences between alternatives _______ be ignored.
should not
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)
sunk cost
If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is
the profit from the best alternative use of the resource
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.
Incremental and avoidable
When should a special order be accepted?
when the incremental revenue from the special order exceeds the incremental costs of the order
A cost that can be eliminated by choosing one alternative over another in a decision. This term is synonymous with differential cost and relevant cost.
avoidable cost
Every decision involves what
choosing between at least two alternatives
A limitation under which a company must operate, such as limited available machine time or raw materials, that restricts the company's ability to satisfy demand.
constraint
Costs that are incurred up to the split-off point in a process that produces joint products.
joint cost
Two or more products that are produced from a common input.
joint product
Segment margin is the best gauge of ______ profitability
long term
A decision concerning whether an item should be produced internally or purchased from an outside supplier.
make or buy decision
Determining whether to carry out an activity in the value chain internally or use a supplier is a
make or buy decision
Differential costs and benefits that should be considered in a decision:
may be qualitative or quantitative
When accepting a special order:
normal sales must not be affected and there must be idle capacity
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
The potential benefit given up when selecting one alternative over another is a(n)
opportunity cost
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
Costs and benefits that always differ between alternatives are ______ costs and benefits.
relevant
Decision bias:
select option that increases NOI
A one-time order that is not considered part of the company's normal ongoing business is a _______ order.
special
Costs that have already been incurred and cannot be avoided regardless of what a manager decides to do are
sunk costs
Irrelevant costs include:
sunk costs and future costs that do not differ between alternatives
When demand for products exceeds the production capacity, a
volume trade-off decision must be made
A company must make a volume trade-off decision when they
must trade off units of one product for units of another due to limited production capacity and do not have enough capacity to satisfy the demand for all of its products (Limited Production Capacity)
A limited resource of some type that restricts the company's ability to satisfy demand is a(n)
constraint
A future cost that differs between any two alternatives
differential cost
Future revenue that differs between any two alternatives.
differential revenue
Direct fixed costs that can be tied to a specific segment. If the segment goes away then that fixed cost would also disappear.
Traceable fixed costs
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 total