Chapter 7: Relevant Revenue and Costs

Question 1

___ represents the difference in revenues and costs among alternative courses of action.

Answer 1

Differential revenues and costs

Question 2

___ is the act of analyzing the difference between differential revenues and costs.

Answer 2

Incremental analysis / Differential analysis

Question 3

___ is the difference between differential revenues and costs and is useful in making managerial decisions related to making or buying products, keeping or dropping product lines, keeping or dropping customers, and accepting or rejecting special custom orders.

Answer 3

Differential analysis

Question 4

When deciding between alternatives, only ___ are relevant and in general, managers select the alternative with the highest profit (lowest cost if only difference is with cost).

Answer 4

Those revenues and costs that differ from the alternative course of action to another

Question 5

Allocated fixed costs are typically not eliminated if a product line is eliminated, and are ___.

Answer 5

Not differential costs

Question 6

Managers compare sales revenue and costs for each alternative and select ___.

Answer 6

The alternative with the highest profit

Question 7

Sales revenue, variable costs, and fixed costs are traced ___.

Answer 7

Directly to customers, not product lines.

Question 8

___ starts with an estimate of the costs incurred to build a product, and a certain percentage is added to establish the price.

Answer 8

Cost-plus pricing

Question 9

Companies often use ___ when it is difficult to determine a reasonable market price.

Answer 9

Cost-plus pricing

Question 10

___ integrates the product design, desired price, desired profit, and desired cost into one process beginning at the product development stage.

Answer 10

Target costing

Question 11

___ is an approach that enables companies to optimize the use of limited resourses such as labor hours, machine hours, and materials.

Answer 11

The theory of constraint

Question 12

What are the five steps associated with the theory of constraint?

Answer 12

1. find the constrained resource (or bottleneck).
2. optimize the use of the constrained resource.
3. subordinate all nonbottleneck resources to the bottleneck.
4. increase bottleneck efficiency and capacity.
5. repeat the first four steps for the new bottleneck.

Question 13

Although accountants are responsible for providing relevant and objective financial information to help managers make decisions, ___also play a significant role in the decision-making process.

Answer 13

Qualitative factors

Question 14

F. Two or more products made from a single input are called ___.

Answer 14

Joint products

Question 15

The cost of ___ and ___ must be allocated to each of the joint products.

Answer 15

Single input
And
Related manufacturing process costs

Question 16

The ___ method allocates joint costs based on a physical measure of output such as pounds or yards of material. Regardless of the allocation methodused, total joint costs and total profit remain the same.

Answer 16

Physical quantities method

Question 17

The ___ method allocates joint costs based on the relative sales value for each of the joint products. Regardless of the allocation methodused, total joint costs and total profit remain the same.

Answer 17

Sales value method

Question 18

___ is the amount of increase or decrease in revenue expected from a course of action as compared with an alternative.

Answer 18

Relevant revenue

Question 19

___ is the amount of increase or decrease in cost that is expected from a course of action as compared with an alternative.

Answer 19

Relevant cost

Question 20

In order for a revenue or cost to be considered relevant it must ___ and ___.

Answer 20

(1) BE A FUTURE COST

(2) DIFFER BETWEEN DECISION ALTERNATIVES

Question 21

___ are costs that have been incurred in the past. They are not relevant to the decision.

Answer 21

Sunk costs

Question 22

___ is the benefit lost when choosing one course of action over another.

Answer 22

Opportunity cost

Question 23

Only ___ and costs are considered in the decision making process.

Answer 23

Relevant revenues

Question 24

quiz: Which of the following statements regarding costs is true?

a. estimating costs accurately at an early stage in the value chain is crucial to developing a profitable product
b. cost is always the determining factoring when setting sales price
c. costs do not become important until production is virtually complete
d. costs are easily controlled at all stages of production

Answer 24

a. estimating costs accurately at an early stage in the value chain is crucial to developing a profitable product

Question 25

quiz: With _____________ managers arrive at a selling price by looking to the market.

a. value pricing
b. target pricing
c. time and materials pricing
d. cost-plus pricing

Answer 25

b. target pricing

Question 26

quiz: The Beach Hut sells hotdogs for $2 each. The costs associated with each hot dog are estimated at $1 of variable costs and $.35 of fixed overhead costs. A summer camp, whose campers will be visiting the beach once during the summer, wishes to buy 100 hotdogs for $1.25 each. What is the minimum price that could be charged for this special order?

a. $1.60
b. $1.25
c. $1
d. $1.35

Answer 26

c. $1

Question 27

quiz: Shoeworks produces and sells athletic shoes for children. The costs associated with each pair of shoes are estimated as $12 of variable costs and $4 of fixed overhead costs. The shoes typically sell for $20 per pair. A local children’s football league has contacted Shoeworks and wishes to purchase 50 pairs of sneakers for $15 each. Their normal supplier of shoes was unable to provide shoes due to a labor strike. If Shoeworks accepts this special order, what will be the effect on the company’s net income?

a. increase of $250
b. increase of $150
c. increase of $50
d. increase of $750

Answer 27

b. increase of $150

Question 28

F. quiz: Book Publishing, Inc operates a bookbinding division. Management is considering whether the hard cardboard for binding should be made internally or purchased from a supplier for $2.35 per book. The current internal production costs for the cardboard average $2.50 of variable costs and $10,000 of fixed costs for the 20,000 books bound annually. What would you recommend Book Publishing do in this situation, and what is the effect on net income?

a. Buy, increase NI by $3,000
b. Make, increase NI by $13,000
c. Buy, increase NI by $13,000
d. Make, increase NI by $3,000

Answer 28

a. Buy, increase NI by $3,000

Question 29

quiz: A computer system installed least year is an example of:

a. a differential cost
b. an avoidable cost
c. a relevant cost
d. a sunk cost

Answer 29

d. a sunk cost

Question 30

quiz: Employee morale at Dos Santos, Inc., is very high. This type of information is known as:

a. an opportunity cost
b. a differential factor
c. a quantitative factor
d. a qualitative factor

Answer 30

d. a qualitative factor

Question 31

quiz: Measuring customer profitability only by looking at whether the sales revenue a customer generates exceeds the cost of goods sold ignores

a. only the depreciation cost
b. manufacturing costs incurred as overhead
c. all the selling and administrative costs incurred to provide customer service and support
d. all fixed costs

Answer 31

c. all the selling and administrative costs incurred to provide customer service and support

Question 32

quiz: Which of the following combinations results in relevant information?

Select one:

a. occurs in the past and is avoidable
b. occurs in the future and is unavoidable
c. occurs in the future and is avoidable
d. occurs in the past and is unavoidable

Answer 32

c. occurs in the future and is avoidable

Question 33

Companies must often decide whether to process a joint product further. When is a good time to process the product further?

Answer 33

If additional sales revenue exceeds additional costs

Question 34

Direct fixed costs are typically eliminated if a product line is eliminated, and are considered ___.

Answer 34

Differential costs