Chapter 12 - Differential Analysis: The Key to Decision Making

Question 1

What is a cost that differs between alternatives?

Answer 1

A relevant cost

Question 2

What is a cost that can be eliminated, in whole or in part, by choosing one alternative over another?

Answer 2

An avoidable cost

Question 3

What is an example of avoidable costs?

Answer 3

Relevant costs

Question 4

What is an example of unavoidable costs?

Answer 4

Irrelevant costs

Question 5

What are 2 broad categories of costs that are never relevant in any decision?

Answer 5

1. Sunk costs

2. A future cost that does not differ between the alternatives

Question 6

True or False:

In each decision situation, the manager must examine the data at hand and isolate the relevant costs

Answer 6

True

Question 7

What is the shorter way to find the total and differential cost analysis’ differential net operating income?

Answer 7

Decrease in direct labor costs + increase in total fixed expense

Question 8

What is one of the most important decisions managers make?

Answer 8

Whether to add or drop a segment

Question 9

What is the layout of the add or drop analysis if you drop?

Answer 9

Lost Sales Revenue (neg)
Improved Variable Costs (pos)
Lost Contribution Margin (neg)
Less: Avoidable Fixed Costs (pos)
Net disadvantage (neg)

Question 10

List 2 examples of costs that are usually unavoidable

Answer 10

1. Depreciation

2. General factory overhead

Question 11

What is a decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier called?

Answer 11

A make or buy decision

Question 12

What is the layout of the rows in the make or buy decision analysis?

Answer 12

Cost per unit
Make
Buy

Question 13

What is the layout of the columns in the make or buy decision analysis?

Answer 13

Outside purchase price
Relevant/Avoidable costs:
Direct materials
Direct labor
Variable overhead
Salary
General factory overhead
Rent
Total cost

Question 14

List 7 examples of avoidable costs

Answer 14

1. Salary
2. Advertising
3. Rent
4. Insurance
5. Direct material
6. Direct labor
7. Variable overhead

Question 15

What is an example of a sunk cost?

Answer 15

Depreciation

Question 16

What is the benefit that is foregone as a result of pursuing some course of action?

Answer 16

An opportunity cost

Question 17

True or False:

Opportunity costs are actual cash outlays

Answer 17

False

Question 18

Are opportunity costs recorded in the formal accounts of an organization?

Answer 18

No

Question 19

What is a one-time order that is not considered part of the company’s normal ongoing business?

Answer 19

A special order

Question 20

What are the only costs and benefits that are relevant when special orders are analyzed?

Answer 20

Incremental costs and benefits

Question 21

Do you include fixed costs in the special order analysis if they are unavoidable?

Answer 21

No

Question 22

What is the layout of the special order analysis?

Answer 22

Increase in revenue
Less: Increase in cost
Increase/Decrease in net income

Question 23

What is the formula to find the special order’s increase in revenue?

Answer 23

of requested units x special price

Question 24

What is the formula to find the special order’s increase in cost?

Answer 24

of requested units x total variable cost per unit

Question 25

What is the formula to find total variable cost per unit?

Answer 25

DM + DL + VMOH + VS&A

Question 26

True or False:

A company should not necessarily promote those products that have the highest unit contribution margins

Answer 26

True

Question 27

What is activity-based costing used to help identify?

Answer 27

Potentially relevant costs

Question 28

What must manager decide before making a decision?

Answer 28

Which of the potentially relevant costs are actually avoidable