BEC 2 Marginal Analysis and Responsibility Accounting Flashcards
Define opportunity costs evaluated in considering an opportunity when the firm is operating at capacity?
Opportunity cost at full capacity is defined as the net benefit given up from the best alternative use of the capacity.
How should management approach a special order decision?
Special orders require a firm to decide if a specially priced order should be accepted or rejected. When there is excess capacity, a special order should be accepted if the selling price per unit is greater than the variable cost per unit. If the company is operating a full capacity, the opportunity cost of producing the special order should be included in the analysis.
How should management approach a make or buy decision?
AKA Insourcing vs. Outsourcing
Managers should consider only relevant costs and select the lowest-cost alternative.
How should management approach a sell or process further decision?
Made by comparing the incremental cost and the incremental revenue generated after the split-off point.
If the incremental revenue exceeds the incremental cost, the organization should process further.
If the incremental cost exceeds the incremental revenue, the organization should sell at the split-off point.
How should management approach a keep or drop decision?
A firm should compare the FC that can be avoided if the segment is dropped (i.e., the cost of running the segment) to the contribution margin that will be lost if the segment is dropped.
The segment should be kept if the lost contribution margin exceeds avoided FC and dropped if the lost contribution margin is less than avoided FC,
Define Contribution by SBU.
Represents the difference between the contribution margin (Revenue - Variable Costs) and controllable fixed costs (those costs that managers can impact in less than one year).
What is the purpose of the balanced scorecard?
The balanced scorecard displays performance relative to critical success factors identified for multiple dimensions of a business operation.
What dimensions or categories of business operation are frequently identified by the balanced scorecard?
F = Finance I = Internal Business Process C = Customer Satisfaction A = Advancement of innovation and HR development
List and define the types of responsibility segments (or strategic business units - SBUs) that are used to established business performance measures.
Cost SBU = Managers are held responsible for controlling costs.
Revenue SBU = Managers are held responsible for generating revenue.
Profit SBU = Managers are held responsible for producing a target profit.
Investment SBU = Managers are held responsible for return on investmetn.
