Chapter 3:Decision Making and Performance Evaluation

Question 1

What are relevant costs?

Answer 1

(Avoidable) costs that differ from alternatives, costs that are in the future.

Ex: DM, DL, outside purchase price, and variable manufacturing overhead.

Question 2

What are irrelevant costs?

Answer 2

(Unavoidable) costs that are the same among alternatives. recurring costs in the past.

Ex: fixed costs

Question 3

What are Action plan for making vs. buy decisions?

Answer 3

1. Identify alternatives (buy / make)
2. Organize costs as relevant or irrelevant costs
3. Consider opportunity cost & qualitative factors

Question 4

What is decentralization?

Answer 4

Allows lower-level managers to make decisions.

Pros:
- Empower employees
- Increased innovation
- Relies on local info

Cons:
- Takes control from top management
- Duplication of processes causes inefficiency

Question 5

What is ROI?

Answer 5

What % of return did the assets generate?
ROI formula =

Operating income / Average operating assets.

Operating income is the top 3 lines of the statement including sales less the COGS & Selling expenses.

Question 6

What is required rate of return?

Answer 6

The required rate of return is the minimum (always given in problems) return an investor is willing to accept when investing in a company’s assets.

Question 7

What is residual income?

Answer 7

Purpose: How much $ did the company earn above the required ROI on the assets.

RI Formula
Operating income - (Minimum ROI (.12 or 12%) x Average operating assets (300k) = $12,000