chapter 7: incremental analysis

Question 1

management’s decision making process

Answer 1

1. identify problem and assign responsibility
2. determine and evaluate possible course of action
3. make a decision
4. review results of the decision

Question 2

financial information

Answer 2

revenues and costs

their effects on the company’s overall profitability

Question 3

non-financial information

Answer 3

effect of decision on employee turnover, the environment, or company’s overall image in the community

Question 4

incremental analysis

Answer 4

the process used to identify the financial expenses that change under alternative courses of action

also called differential analysis

when using it, either costs AND revenues vary, or, costs OR revenues vary

identifies the probably effects of decisions on future earnings

Question 5

three important cost concepts used in incremental analysis

Answer 5

relevant cost

opportunity cost

sunk cost

Question 6

relevant cost

Answer 6

1. costs and revenues that are different for each alternative
2. costs and revenues that will occur in the future

not the same as sunk cost

Question 7

opportunity cost

Answer 7

the lost benefit from choosing one action over the other

Question 8

sunk cost

Answer 8

costs that have already been incurred

they will not be changed or avoided by any future decision

should not affect decision of the future

not the same as relevant cost

Question 9

quantitative factors that affect a decision

Answer 9

attributes that can be expressed in numbers or $

Question 10

why is activity based costing useful for the incremental analysis approach?

Answer 10

better associates actual increases in overhead costs

better identification of relevant costs

Question 11

most common incremental analysis decision types

Answer 11

1. accept an order at a special price
2. make or buy component parts or finished products
3. sell products or process them further
4. retain or replace equipment
5. retain or eliminate unprofitable business segment
6. allocate limited resources

Question 12

price concession for a customer

Answer 12

lowering prices for a customer

Question 13

if a firm operates at full capacity, will a special order usually accepted or rejected?

Answer 13

usually rejected

Question 14

outsourcing

Answer 14

manufacturer’s decision to make or buy parts for assembly

Question 15

when should you keep making and when should you sell?

Answer 15

keep making when revenues from making it some more exceed the extra costs

Question 16

joint products

Answer 16

several end products produced from a single raw material

they are a common production process?

Question 17

joint product costs

Answer 17

all costs that are incurred before the point point at which the two products are separately identifiable

these are sunk costs

they have already been incurred and the company cannot either change or avoid them

Question 18

if you want to replace machinery, is it relevant to know how much you going to get from it if you sell it?

Answer 18

yeee boyyy

Question 19

if you want to replace machinery, is it relevant to know the book value of the machine you trying to sell?

Answer 19

naaah boy

its sunk costs

it does not affect the future decision

Question 20

f you want to replace machinery, is it relevant to know the costs of past reparations?

Answer 20

naaah boy

its sunk costs

it does not affect the future decisions

Question 21

contribution margin of each limited resource

Answer 21

contribution margin per unit / number of limited resources required per unit

Question 22

theory of constraints

Answer 22

approach of evaluating constraints

managing constraints to improve results