Accounting Quiz 2

Benefits of Budgeting:

1. Planning a. Financial terms 2. Communication & Coordination b. Among & between departments/functions 3. Resource Allocation c. Scarce resources 4. Evaluation & Control d. Benchmarking

Budgeting

A budget is a comprehensive financial plan for achieving the financial and operational goals of an organization

incremental costs/revenues

Additional cost/revenue, relevant if different between alternatives

opportunity costs

Benefits foregone, relevant for decision making

A compensation method whereby employees are paid according to the amount they sell in a given time period is known as:

Commission-based compensation

fixed costs

Costs that remain the same in total regardless of changes in activity

With variable costs, the cost per unit varies with changes in volume. True or false?

False

The production schedule in units:

Is dependent upon the sales forecast for the period

pure competition

Market determines selling price Individual company is price taker Example: Feed corn in agriculture

What business is considered part of an oligopoly?

Oil Companies

Sunk costs are

Past, irrelevant for decision making

A compensation method under which a company pays employees according to the number of items they produce during a given time-period is known as:

Piece-rate pay

PDCA

Plan, Do, Check, Act -Feedback loop allows management to continuously improve.

Budgeting: Planning and Control

Planning: Developing objectives for acquisition and use of resources Control: Steps taken by management to ensure that objectives are attained

Accepting a special order is profitable whenever the revenue from the special order exceeds:

The incremental cost of producing the order.

Costs that rise and fall proportionately with the volume of output are often referred to as:

Variable costs

EOQ

-Economic Order Quantity Short term model and focus Minimizes incremental ordering and holding costs

JIT

Just in Time. Long term philosophy Assumes product-sustaining and facility-sustaining costs are relevant

A budgeting system that allows individuals who are affected by the budget to have input into the budgeting process is called:

Participative budgeting

target pricing

-Setting a selling price for the life of the product/service based on the market 1. Determine selling price 2. Determine required return 3. Set target cost.

monopolistic competition

1. Market influences selling price 2. Individual companies influence selling price through advertising Example: Apple Computer (influence with advertising)

Monopoly

1. One company controls market and selling price 2. Government approves price changes Example: Utility companies

Three philosophies used to setting budgets:

1. Participative including bottoms-up approach 2. Mandated or Top down approach, or the more common in the business world.. 3. A hybrid of the aforementioned two approaches

Steps in Budget Process:

1. Sales Budget- where it all starts the entire process 2. Production budgets- MaLOH (Direct materials, direct labor, and manufacturing OH budgets) 3. COGS 4. Selling & administrative budget 5. Cash budget 6. Financial Budgets- Balance sheet, income stmt., cash flow, and capital.

What are the Common Reasons for Not Holding Inventory?

1. Significant costs are incurred 2. Holding inventory allows the company to "hide" its internal process problems because demand can be met from inventory

Oligopoly

1. Very few companies control selling price 2. Government monitors selling prices Example: OPEC (Oil Producing & Exporting Countries)

Incremental analysis rarely requires the decision maker to exercise judgement. True or false?

False

One characteristic common to all types of cost is the tendency to rise and fall in direct proportion to the changes in volume of business output. True or False?

False

The volume of output which causes fixed costs to be equal in amount to total revenue is called the break-even point. True or false?

False

Hourly pay

Pay based on hours worked

Salary pay

Pay based on period of time

Commission pay

Pay based on sales

Piece Rate Pay

Pay based on units completed

The pricing strategy where a company initially sets the price of its product low and then raises it later on in the product's life cycle is called:

Penetration Pricing

Which of the following describes the practice of setting the price of a product at less than cost to take over a market and then to raise the price?

Predatory Pricing

The question of how many units of product to manufacture would be considered when preparing the:

Production budget

Direct Materials

Raw materials & component parts that become an integral part of finished products. Can be traced directly and conveniently to products

predatory pricing

Setting a low initial selling price to drive out the competition ILLEGAL

Gouging

Setting high price due to unusual demand ILLEGAL Example: Charging $10 each for bottled water after hurricane Katrina

When the iPhone was introduced its price was set by which of the following?

Skimming Pricing

All incremental revenue or incremental costs are relevant. True or false?

True

Contribution margin is total revenue less variable costs. True or false?

True

Costs which increase in total amount in direct proportion to an increase in output are called variable cost. True or false?

True

Sunk costs have already been incurred and cannot be changed by future actions. True or false?

True

The term "out-of-pocket cost" is often used to describe costs which have not yet been incurred and which may vary among alternative courses of action. True or false?

True

Which of the following is not a factor in the EOQ inventory model?

a. Annual demand for the inventory in the units b. Cost to place one additional order c. Cost to carry one additional unit in inventory d. All are factors in the EOQ model Answer: D

Which of the following is not a factor when using "Target Pricing"?

a. Determining the price based on consumers surveys b. Determine the markup necessary to get a satisfactory return to stockholders c. Determining the price of competitors so our price will be lower d. Determine the target cost and see if product can be produced for that amount Answer: C

Which of the following statements is false?

a. JIT is a pull system b. The JIT philosophy is based on continuous improvement c. JIT requires a company to have strong relationships with its suppliers d. All of the above are true Answer: D

The seller of a product is a price taker in which of the following environments?

a. Monopolistic competition b. Pure competition c. Monopoly d. Oligopoly Answer: Pure Competition

Which of the following budgets is completed first?

a. Raw materials purchases b. Cash payments c. Production d. Sales Answer: D

Manufacturing Overhead

all manufacturing costs except direct materials and direct labor

life cycle pricing

attempts to establish a price that can be maintained throughout the life of the product

variable costs

costs that vary in total directly and proportionately with changes in activity

Mixed Costs

have both fixed and variable portion, therefore they change in total but not proportionately with changes in activity; may use high/low method to break into VC/FC components

Direct Labor

is the effort of employees who actually convert materials into a finished product. Cab be separately and readily traced to the individual units of product being maufactured.

penetration pricing

setting a low initial selling price to entice customers to try the products/service LEGAL

skimming pricing

setting higher initial selling prices due to uniqueness of product LEGAL