Chapter 3

Question 1

Pricing

(Two Ways)

Answer 1

• Market-Determined Price
  
  • use product cost infomration and decide wheterh its cost strucutre will allow it to compete profitably
• Organization-Set Price
  
  • organizations will often set a price that is an increment of its product’s cost
  • Called cost plus pricing

Question 2

Cost Plus Pricing

Answer 2

• A pricing approach where an organzation sets a price that is an increment of its product’s cost

Question 3

Target Costing

Answer 3

• A tool used in product planning to focus efforts in product and process design on developing a product that has a good profit potential in view of market requirements

Question 4

Budgeting

Answer 4

• one of the most widespread uses of cost information
• a management accounting tool that projects or forecasts costs for various levels of production and ssales activity

Question 5

Variable Costs

Answer 5

• one that increases proportionally with changes in the activity level of some variable
• example: the acquisition and consumption of the wood creates a cost for wood that increases proportionately with the number of chairs made

Question 6

Cost Driver

Answer 6

• a variable that causes a cost
• example: a rocking chair

Question 7

Variable Cost Formula

Answer 7

Variable Cost

=

Variable cost/ unit of cost driver x Cost Driver Units

Question 8

Fixed Cost

Answer 8

• a cost that does not vary in the short run with a specified activity
• Depends on the amount of a resource that is acquired rather than the amount that is used
• Often _capacity-related costs _
• examples: depreciation, wages paid to production supervisors

Question 9

Total Cost

Answer 9

Variable Costs + Fixed Costs

Question 10

Cost-volume-profit (CVP) analysis

Answer 10

• using the concepts of variable and fixed costs to dentify the profit associated with various levels of activity

Question 11

Profit Equations

Answer 11

• Profit = Revenue - Total costs
• = Revenue - Variable Costs - Fixed Costs
• = Contriubtion Margin x Units produceds and Sold - Fixed Costs

Question 12

Contribution Margin

Answer 12

• The difference between the total revenue and total variable costs

Question 13

Contribution Margin Per Unit

Answer 13

• the contribution that each unit makes to coverning fixed costs and providing a profit

Question 14

Contribution Margin Ratio

Answer 14

• The ratio of contribution margin per unit to selling price per unit
• the fraction of each sales dollar that is available to cover fixed expenses and produce a profit

Question 15

Units Needed to be Sold Equation

Answer 15

• (Target Profit + Fixed Costs ) / (Contribution Margin Per Unit)
• Used to calculate the breakeven volume

Question 16

Required Unit Sales

(target profit as % of revenue)

Answer 16

• required unit sales = (fixed costs) / (contribution margin per unit - 20% x price per unit)

Question 17

Target Profit

(Including Taxes)

Answer 17

• target profit = [(contribution margin per unit x required unit sales) - Fixed Costs] x (1 - Tax rate)

Question 18

Required Unit Sales Including Tax Rate

Answer 18

• required unit sales = [(target profit/(1-tax rate) + fixed costs)]/ contribution margin per unit

Question 19

What-if Analysis

Answer 19

*

Question 20

Incremental Profit Formula

Answer 20

• Incremental Profit = Incremental Contribution margin - Incremental cost
• Example: spending extra money on advertising

Question 21

Two product CVP equation

Answer 21

• profit = rocking chair contribution margin x rocking chairs sales + kitchen chair contribution margin x kitchen chair sales - fixed costs

Question 22

Breakeven Point

Answer 22

• when the profit is 0

Question 23

The Bundle Apporach

Answer 23

• bundling the two products together in order to because illustrate the number sold
• example: 1 “bundle” is 20 rocking chairs and 80 kitchen chairs
  
  • sell 3 bundles, 60 rocking chairs are sold and 240 kitchen chairs are sold
    *

Question 24

Assumptions Underlying CVP Analysis

Answer 24

• the price per unit and the variable cost per unit (therefore the contribution margin per unit) remain the same over all levels of production
• All costs can be classified as either fixed or variable or can be decomposed into a fixed and variable component
• Fixed costs remain the same over all contemplated levels of production
• Sales equal production

Question 25

Mixed Cost

Answer 25

• a cost that has a fixed component and a variable component
• example: cell phone bill (fixed monthly rate, as well as how much data you use or w/e)

Question 26

Step Variable Costs

Answer 26

• Increases in steps as quantity increases
• example: the total cost of supervisory salaries per 30 workers

Question 27

Incremental Costs

Answer 27

• the cost of the next unit of production and is similar to the economist’s notion of marginal cost
• generally defined as the variabl cost of a unit of production
  
  • however, the variable cost per unit may change as production volume chagnes
  • if the cost is a step vaiable, treating the cost as a variable cost will lead to estimation errors

Question 28

Sunk Costs

Answer 28

• a cost that results from a previous commitment and cannot be recovered

Question 29

Sunk Cost Phenomenon

Answer 29

• Referred to sometimes as the Concorde Effect or the COncorde Fallacy
• When sunk costs affect managerial decisions, even though they shouldnt

Question 30

Relevant Cost

Answer 30

• A cost that will change as a result of some decision
• example: the extra money you will spend going to a concert you already have a ticket for

Question 31

Avoidable Cost

Answer 31

• A cost that can be avoided by undertaking some course of action
• The most obvious avoidable costs are variable costs

Question 32

Opportunity Cost

Answer 32

• The maximum value forgone when a course of action is chosen
• provide important insights at the individual product level

Question 33

Make-or-buy Decision

Answer 33

• deciding whether to contract out for a product or service
• Focusing on if the costs avoided internaly are greater than the external costs that will be incurred

Question 34

Examples of Internal Costs Avoided

Answer 34

• example: internal costs avoided
  
  • all variable costs
  • any avoidable fixed costs such as the cost of supervisory personnell who would be laid off or machinery that would be sold

Question 35

Examples of External Costs Incurred

Answer 35

• The cost of purchasing the part
• Any transportation costs
• Any other costs involved in dealing with the outside supplier, ordering the product and receiving and inspecting it

Question 36

Manufacturing Costs

(3 groups)

Answer 36

• Classified into 3 groups
  
  • Direct Materials
  • Direct Labor
  • Manufacturing Overhead

Question 37

Direct Material Costs

Answer 37

• Materials that can be traced easily to a unit of output and are of significant economic consequence of to the final product

Question 38

Direct Labor Costs

Answer 38

• Those labor costst that can be traced easily to the creation of a unit of output
  *

Question 39

Manufacturing Overhead Costs

Answer 39

• All costs incurred by a manufacturing facility that are not direct materials costs or dierct labor costs
• example: materials that are not of significant economic consequence to the final product

Question 40

Floor Price

Answer 40

• The minimum price that a company would normally consider for the order
• computing it exploits the relevant cost idea by considering the cost that will change as a result of taking the order