Managerial Final Review
Average Operating Assets
(beginning assets + ending assets) / 2
Which of the following may be an advantage of making a part rather than buying it?
A smoother flow of parts and materials for production Less dependence on outside suppliers
Product Costs
All costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead.
Mixed Costs
Costs that contain both a variable- and a fixed-cost element and change in total but not proportionately with changes in the activity level.
Which of the following is not a characteristic of decentralization?
Decentralization reduces how accountable lower-level managers are for the outcomes of their decisions.
Return on Investment (ROI)
Net Operating Income / Average Operating Assets
margin
Net Operating Income / Sales
turnover
Sales / Average Operating Assets
Negotiated transfer prices BLANK
are consistent with decentralization preserve the autonomy of the divisions use the expertise of managers in weighing the costs and benefits of the transfer
A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in BLANK
contribution margin
Period Costs
costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued
An organization in which decision-making authority is spread throughout the organization is BLANK
decentralized
Manufacturing Costs
direct materials, direct labor, manufacturing overhead
Suppose a project with a negative net present value would provide intangible benefits. To estimate the annual value of intangible benefits needed to accept the project, BLANK the negative net present value excluding intangible benefits by the BLANK
divide, present value factor for an annuity
Opportunity costs are not found in accounting records because they are not relevant to decisions. true or false
false
Net Present Value
have negative initial investment in now column and negative working capital. then put annual cost savings, salvage value, and working capital released in the correct years to follow. This is the total cash flows at the bottom of each column,, multiply this by the discount rates found on the present value of a dollar side of the worksheet. Add all of these together to find the net present value.
When using net present value to compare projects, the total cost approach BLANK
includes all cash inflows and outflows under each alternative is the most flexible method available to compare projects
In an equipment capital budgeting decision, recovering the original investment means that the BLANK
investment has generated enough cash inflows to completely cover the cost of the equipment
Factor of the internal rate of return
investment required / annual net cash inflow
Payback Period
investment required / annual net cash inflow
Costs and benefits that should be ignored when making decisions are called BLANK costs and benefits.
irrelevant
Using sales dollars to allocate fixed costs from service departments to operating departments BLANK.
is simple and straightforward is often a poor base because sales dollars vary from period to period is often viewed as a measure of ability to pay
Typical capital budgeting decisions include BLANK decisions.
lease or buy equipment selection cost reduction
If the internal rate of return is BLANK
less than the hurdle rate the project should be rejected greater than the hurdle rate the project is acceptable
Internal Rate of Return
less than the hurdle rate the project should be rejected greater than the hurdle rate the project is acceptable
The Eye Clinic of Dr. Christensen is investing in some equipment to perform corrective eye surgery. It is expected that the equipment purchase will generate an internal rate of return of 24%. This equipment was chosen over equipment to perform cataract eye surgery. Thus, the internal rate of return of the cataract eye surgery equipment must have been Blank______.
less than the internal rate of return of the corrective eye surgery equipment
When analyzing an investment project, uncertain future cash flows BLANK
may be estimated using computer simulations
annual net cash inflow
net operating income + depreciation
finding residual income
net operating income - (average operating assets x minimum required return)
Working capital BLANK
often increases when a company takes on a new project
Segmented Income Statement
provides revenue and cost data for each segment of the company in a comparative fashion (side by side)
Differential revenue is an example of a(n) BLANK benefit.
relevant
When making a decision only BLANK costs and benefits should to be included in the analysis.
relevant
The net present value of a project is BLANK
the difference between the present value of cash inflows and present value of cash outflows for a project used in determining whether or not a project is an acceptable capital investment
Using the market price to set transfer prices may not be the best approach when BLANK
the selling division has idle capacity
If the transfer has no effect on fixed cost, the transfer price from the selling division's standpoint must be equal to or greater than the variable cost per unit + (BLANK ÷ number of units transferred).
total contribution margin on lost sales
When the cash flows associated with an investment project change from year to year, the payback period must be calculated BLANK
by tracking the unrecovered investment year by year
The first step in decision making is to BLANK
define the alternatives
Reggie's Refrigerators is considering the purchase of some new equipment. The company has limited its purchase options to two alternatives. Option A has an internal rate of return of 10%, and option B has an internal rate of return of 13%. If the required rate of return on the project is 9.5%, which option is the preferred choice?
option B is the preferred choice
The length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates is the BLANK
payback period
A manager might reject a proposal using ROI that the manager would accept using residual income. true or false
true
True or false: When calculating the payback period, the depreciation on the investment is excluded and thus must be added back to obtain the project's expected annual net cash inflow.
true
internal rate of return
use the factor and the present value of annuity side of formula sheet to find percentage after amount of years
What are some of the pitfalls of allocating fixed costs on a variable allocation base, such as departmental sales?
Departments with higher or improving sales will be allocated a larger percentage of the costs, thus shifting costs to their departments. Costs allocated to one department are heavily influenced by what happens in other departments.
Which of the following statements is not a weakness of using return on investment (ROI) to evaluate performance?
ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies.
Which of the following statements is incorrect regarding responsibility accounting?
Responsibility accounting refers to the process of evaluating top management on the decisions made by lower-level managers.
Which of the following statements are true?
When using the internal rate of return method, the cost of capital is used as the hurdle rate. When the net present value method is used, the discount rate equals the hurdle rate. The cost of capital may be used to screen out undesirable projects.
Potential advantages of dropping a product line or other segment include BLANK
avoiding more fixed costs than the company loses in contribution margin an overall increase in net operating income
Valid criticisms of evaluating performance based on return on investment (ROI) include managers may BLANK
be put in charge of a business segment that includes committed costs over which a manager has no control reject investment opportunities that are profitable for the company but have a negative impact on a manager's ROI take actions that increase ROI in the short-run at the expense of long-term performance
To screen out undesirable investments, BLANK use(s) the cost of capital.
both the net present value and internal rate of return methods
When a transfer has no effect on fixed costs, to be acceptable to the selling division, the transfer price must BLANK
cover the variable costs per unit cover any lost contribution margin due to the transfer cover any opportunity cost from lost sales
Isolating relevant costs is desirable because BLANK
critical information may be overlooked with the total cost approach irrelevant costs may be used incorrectly in the analysis all information needed for the total cost approach is rarely available
When computing the payback period for a new piece of equipment, the salvage value of the equipment being replaced is BLANK
deducted from the cost of the new equipment
Margin of Safety
difference between your actual or expected profitability and the break even point
When allocating fixed costs of service departments, the fact that operating departments do not need the peak level of service every period BLANK
does not impact the total allocation of costs
determine effect on total net operating income if there is a special order
have a per unit column and the total amount of units column. then find the incremental revenue for both, subtract all the variable and fixed costs to find the total incremental costs. subtract the total incremental costs from the revenue see if there is a financial advantage or disadvantage of the special order.
The payback method BLANK
ignores all cash flows that occur after the payback period does not consider the time value of money is not a true measure of investment profitability
If cost is used as a transfer price, the only division with an opportunity to make a profit on the transfer is the division that BLANK
makes the final sale to an outside party
Assume the selling division has no idle capacity and must give up outside sales, but does not lose anything by selling internally rather than outside. In addition, the buying division has an accurate assessment of how much it costs the company for the transfer to take place. Under this situation, which pricing method is being used?
market price
When managers are evaluated on residual income, rather than on return on investment (ROI), they will be BLANK likely to pursue projects that will benefit the entire company.
more
Conducting a post audit does what?
provides an opportunity to cut losses on floundering projects flags any manager's attempts to inflate benefits or downplay costs in a project proposal provides an opportunity to reinforce and possibly expand successful projects
Capital budgeting decisions BLANK
require a great deal of analysis prior to acceptance involve an immediate cash outlay in order to obtain a future return
A company is considering buying a component part that they currently make. Items related to the equipment being used to make the component that are relevant to this decision include BLANK
salvage value alternative uses for the equipment
Little Tots Gym has a required rate of return of 13%. The gym is considering the purchase of $12,500 of new equipment. The internal rate of return on the project has been calculated to be 11%. should this project be accepted or rejected?
should be rejected
preparing an analysis to see if a product should be eliminated
start by identifying and adding all the avoidable expenses together. Take this number and subtract it from the contribution margin to see if the net income is better or worse than it would be if the product was not dropped.
Costs that have no impact on future cash flows and are irrelevant to decisions are BLANK costs.
sunk
break-even point
the point at which the costs of producing a product equal the revenue made from selling the product
When making a decision, irrelevant items are included in the analysis of both alternatives when using BLANK
the total cost approach only
Managers of cost centers are evaluated on BLANK
their ability to control costs in their responsibility center
Operations are able to respond quickly to customers and changes in the environment in a decentralized organization because BLANK
there are fewer managers that must be consulted before a decision is made
The price charged when one segment of a company provides goods or services to another segment of the same company is the BLANK price.
transfer
Working capital is BLANK
treated as a cash outflow when required at the beginning of a project. treated as a cash inflow when released at the end of a project.