COST Accounting Exam 4

A strategic business unit (SBU) consists of a well-defined set of controllable operating activities over/about which the SBU manager is:

Responsible for strategy, execution, and performance.

Production or support SBUs within the firm that have the goal of providing the best quality product or service at the lowest cost are:

cost centers

5S

deals with the physical workplace evaluating the workplace organization capability and visual management standards based on 5 steps: Sort Straighten Shine Standardize Sustain engages people through standards and discipline

visual factory

describes how data and information is conveyed in a lean manufacturing environment combination of signs, charts and other visual representation enables the quick dissemination of data attempts to reduce the time and resources required to communicate the same information verbally or in written form

Residual income (RI) may be a better measure for performance evaluation of an investment center than return on investment (ROI) is because:

desirable investment decisions will not be discouraged by high-rate-of-return divisions

Which of the following statements regarding cost of capital is not true? a. It reflects the perceived level of risk for which investors in debt and equity securities expect to be compensated. b. It is another term for "required rate of return." c. It is typically defined as a weighted-average of all sources of capital for the company. d. It is used to calculate the present value of anticipated after-tax cash flows for a project. e. It is used when calculating the internal rate of return (IRR) of a proposed investment.

e. It is used when calculating the internal rate of return (IRR) of a proposed investment.

market-share:

effect of changes in market share on total CM and operating income

market-size variance:

effect of changes in the market size on total CM

sales- mix variance:

effect on contribution margin of changes in relative proportions of the company's products from the budgeted proportions

sales-quantity variance:

effect on operating results in the number of units sold of a product and the number budgeted

flexible budget (or selling price variance)

effects of changes in budget vs. actual sales price

sales volume variance

effects of changes in the budget vs. actual sales volume

teams

empowered teams that can make decisions on the spot cross-train

Without knowing its required rate of return (i.e., hurdle rate) for use in the evaluation of capital investment projects, a company will be unable to calculate a project's:

payback period: no book ROR: no net present value: yes internal ROR: no

SBUs that generate revenues and incur the major portion of the cost for producing those revenues are:

profit centers

value streams

represents all activities and resources consumed from the time a customer order is received until the product is delivered to the customer. includes monitoring product quality and customer service as well as the value stream's contribution to profit Value-stream teams are established to manage and continuously improve the flow of products from customer order to customer shipment.

the objectives of management control of the manager include:

motivation, incentive, and fairness

Possible causes of a FOH Spending Variance:

-new union contract resulting in change in supervisor's salary - replacement of equipment that was not expected in the static budget -insurance premium change that was unexpected -insurance or property taxes

Possible causes of a FOH Production Volume Variance:

-production time lost due to poor quality materials -errors in production scheduling -changes in market demand -choice of cost driver activity level ( choosing an ideal standard rather than a practical standard) -machine breaking

Of most relevance in deciding how or which costs should be assigned to an SBU is the degree of:

Controllability

Return on Investment (ROI), though widely used, is subject to which one of the following limitations?

ROI may motivate managers to take sub optimal decisions from the standpoint of the organization as a whole

Chapter 19

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For a capital investment project, a net present value (NPV) of $500 indicates that the: a. Project's true or economic rate of return exceeds the hurdle (discount) rate. b. Project's internal rate of return (IRR) is likely unacceptable. c. Present value of cash outflows exceeds the present value of cash inflows. d. Total cash outflows for the project are expected to be $500. e. Internal rate of return (IRR) exceeds the accounting rate of return (ARR) on the project.

a. Project's true or economic rate of return exceeds the hurdle (discount) rate.

Possible causes of a VOH Spending Variance:

actual price for VOH items differed from standard price actual quantity used of VOH items differed from standard quantity

Intolerance of uncertainty is a behavioral effect that often motivates managers to: a. Invest heavily in strategic-related investments. b. Choose projects with short payback periods. c. Invest in a few large, sequential investments. d. Invest in projects with relatively long payback periods. e. Favor projects that are mutually exclusive.

b. Choose projects with short payback periods.

Conceptually, a firm's capital structure is its: a. Mix of debt and equity capital, expressed in book-value terms. b. Mix of debt and equity capital, expressed in market-value terms. c. Equity capital only, expressed in book-value terms. d. Equity capital only, expressed in market-value terms.

b. Mix of debt and equity capital, expressed in market-value terms

which of the following is not a characteristic of capital budgeting post-audits? a. They provide feedback to managers regarding the soundness of their decision-making. b. They encourage managers to build slack into capital investment proposals. c. They are in-depth reviews of completed capital investment projects. d. They use both financial and nonfinancial information. e. They only use the actual results of the capital investment project.

b. They encourage managers to build slack into capital investment proposals.

Which one of the following is a drawback of decentralization? a. Uses local knowledge only. b. May hinder coordination among independent SBUs. c. Provides less effective operational control. d. May affect goal congruence. e. Offers an inefficient method of performance evaluation.

b. may hinder coordination among independent SBUs.

The main concept of the balanced scorecard is that, to evaluate the SBU's progress to strategic success, an organization must use all of the following except: a. Both financial and non-financial measures. b. Value chain analysis. c. Measures of customer satisfaction. d. Multiple measures for a comprehensive evaluation.

b. value chain analysis

A 15% internal rate of return (IRR) on a proposed capital investment indicates all of the following except: a. The economic rate of return on the project is expected to be 15%. b. Use of a 15% discount rate would result in an estimated project NPV of zero. c. An acceptable capital project if the cost of capital is 16 percent or higher. d. A positive net present value (NPV) if the cost of capital is less than 15%. e. An acceptable project, in a present value sense, if the discount rate is less than 15%.

c. An acceptable capital project if the cost of capital is 16 percent or higher.

Which one of the following statements concerning capital budgeting is not true? a. A basic objective underlying capital budgeting is to select assets that will earn a satisfactory return. b. Capital budgeting is the process of identifying, evaluating, selecting, and controlling long-term investment projects. c. Because of the existence of advanced forecasting techniques, capital budgeting is based on precise estimates of future events. d. Capital budgeting involves estimating the revenues and costs of each proposed project, evaluating their merits, and choosing those worthy of investment. e. Capital budgeting uses after-tax cash flows in the analysis of proposed investments.

c. Because of the existence of advanced forecasting techniques, capital budgeting is based on precise estimates of future events.

Which one of the following is an advantage of the accounting (book) rate of return (ARR) method for analyzing capital investment proposals? a. It is not affected by different accounting methods. b. It is precise and objective. c. Data for calculating the return are typically readily available. d. The method explicitly adjusts for the time value of money. e. ARR is generally approximately equal to a project's internal rate of return (IRR).

c. Data for calculating the return are typically readily available.

Sensitivity analysis is used in capital budgeting to a. Estimate a project's internal rate of return (IRR). b. Determine the optimal contribution margin given a set of resource constraints. c. Determine the amount that a variable in a decision can change without generating unacceptable results. d. Simulate probabilistic customer reactions to a new product. e. Capture income tax consequences.

c. Determine the amount that a variable in a decision can change without generating unacceptable results.

Because the full-cost method of transfer pricing includes fixed cost, it can:

cause sub-optimal short-term decision making

kaizens

continuous improvement

lean enterprise

continuous improvement process discipline defect reduction space reduction throughput time reduction waste elimination growth strategy (not a cost cutting strategy)

Possible causes of a VOH Efficiency Variance:

extent of efficiencies in use of the VOH cost driver (example using more or less of DLH than expected when DLH is the cost driver) thus, it is related to the efficiency of the cost driver how efficient you use the cost driver

Put simply, transfer pricing is a management tool for assigning a "price" to internally transferred goods (or services) in order to simulate the marketplace, thus encouraging mangers to make decisions that are in the best interest of the:

firm as a whole

one-piece flow

focuses on completing the production of one piece from start to finish with as little work in process inventory between operations as possible As work on the product is finished at one station, it is moved into the staging area of the next station only when space is available reduces waiting time, shortens total production time, and decreases customer delivery time

SBUs that include the assets they employ as well as profits in the performance evaluation are:

investment centers

JIT

just-in-time production is based on specific customer orders, so that the production cycle starts only once a customer has placed an order production should be "pulled through"

poka yoke

mistake proofing to prevent errors from occurring

The most important objective of a strategic performance measurement system is:

motivation

objectives of lean enterpirse

serve customers accelerate bottom AND top line growth increase capabilities reduce inventories

takt time

tells you the pace of production the rate at which a finished product needs to be completed in order to meet customer demand the sell rate is the takt time

The biggest problem with cost-based transfer prices is:

the fact that their use may result in sub-optimal decisions from the standpoint of the organization as a whole

work cells

the logical and strategic arrangement of resources in a business environment, organized so as to improve process flow, increase efficiency and eliminate wastage

The greatest advantage of using a negotiated transfer price is:

this may be the most practical approach when conflicts exist between selling and buying divisions

TPM

total production maintenance is a system of maintaining and improving the integrity of production and quality systems through the machines, equipment, processes, and employees that add business value to an organization

The principal-agent economic model applied to employment contracts includes two of the following management performance aspects:

uncertainty and lack of observability

Other things being equal, income computed by the variable costing method will exceed that computed by the full costing method if:

units sold exceed units produced

Use of net book value (NBV) in valuing investment in operating plant assets for investment centers, in contrast to using an estimate current value, will:

usually overstate ROI

kanban

visual signal or card that signlas steps in the manufacturing process signals when there needs to be a reorder and determines the standard quantity that needs to be ordered empty bin to let them know they need to reorder

standard work

work in which the sequence of job elements has been efficiently organized, and is repeatedly followed by a team member