BEC - Operations Management

Question 1

Certainty Equivalent Adjustments

Answer 1

A risk analysis technique that is based upon utility theory. It represents the maximum amount one is willing to pay for a gamble. It is also the minimum premium one is willing to pay to insure against some risk.

Question 2

Standard Cost System

Answer 2

Used by companies involved in mass production of products. Cost categorization by materials, labor, and overhead fits well with cost standards and variance analysis.

Both mass production and service industries use standard cost systems.

Question 3

Transfer Price

Answer 3

The internal price charged by a selling department of company for a raw material, component, finished good, or service to a buying department of the same company.

Transfer Pricing Methods:
Market-Based
Cost-Based
Negotiated Price

Question 4

Direct Labor Rate Variance

Answer 4

(Actual Labor Price per hour - Standard Labor Price per hour) x Total actual Hours which is (Units x Hours per Unit)

(21-20) x (9,000 x 2.5) = 22,500

Question 5

Bottom-Up Budgeting

Answer 5

Also called participative budgeting, beings with a list of items that individual departments want, assigns a cost to each item on the list, and then totals up all the items to arrive at an overall budget #.

Padding or Building Slack is a problem because managers might overstate their expected spending amount.

Question 6

Return on Investment (ROI)

Residual Income (RI)

Answer 6

Calculated by dividing invested capital into the net income.

Amount of net income in excess of a minimum desired rate of return on invested capital.

Question 7

Breakeven Point Calculation

Answer 7

Fixed Cost / (Price Per Unit - Variable Cost Per Unit)