Exam 2

Question 1

What are the categories of cost drivers?

Answer 1

1) structural
2) organizational
3) activity

Question 2

Define and give an example of a structural cost driver.

Answer 2

fundamental choices about size and scope of operations and technologies employed
– infrequent, but committing decisions

ex: determining whether to reach out to a global marketplace

Question 3

Define and give an example of an organizational cost driver.

Answer 3

choices concerning organization of activities and personnel involvement in decision-making

ex: working closely with a limited number of suppliers

Question 4

Define and give an example of an activity cost driver.

Answer 4

activity performed to serve needs that consumes costly resources
– not decision-oriented

ex: setting up a machine

Question 5

Define cost driver. What is the most basic cost driver?

Answer 5

something that causes or influences costs

customer demand

Question 6

What did the Sarbanes-Oxley Act of 2002 do?

Answer 6

• • mandated INTERNAL CONTROL SYSTEMS

- - required CEOs and CFOs to annually review internal control systems and issue a statement

Question 7

What are the “internal control systems” required by Sarbanes-Oxley 2002?

Answer 7

policies and procedures to ensure company objectives are being achieved with regard to…

• • effectiveness and efficiency of operations
• • reliability of financial reporting
• • compliance with laws

Question 8

What are the 3 possible strategic positions that lead to success?

Answer 8

1) cost leadership
2) product or service differentiation
3) market niche

Question 9

What are the components of the management cycle?

Answer 9

1) planning
- - selecting goals/strategies
2) organizing
- - putting together depts to work toward goals
3) controlling
- - ensuring that results agree with plans

Question 10

What are the key dimensions of competition?

Answer 10

price/cost

quality

Question 11

What are the 3 themes of strategic cost management?

Answer 11

1) strategic position analysis
2) cost driver analysis
3) value chain analysis

Question 12

Define goal, strategy, and mission.

Answer 12

Goal: definable, measurable objective
Strategy: course of action to assist in achieving goals
Mission: basic purpose to which activities are directed

Question 13

How do consumers select products/services (ex: competitive markets)?

Answer 13

1) price/cost
2) quality
3) service

Question 14

What are the cost behavior patterns?

Answer 14

1) variable costs (Y = bX)
2) fixed costs (Y = a)
3) mixed/semivariable (Y = a+bX)
4) step costs (Y = a)

Question 15

What is the total cost equation?

Answer 15

Total Cost = Total FC + (VC * Q)

Y = a + bX

Question 16

When is the total cost function used?

Answer 16

for cost estimation

only useful within relevant range

Question 17

What are the types of fixed costs?

Answer 17

committed (capacity): required to maintain current production capacity or to fulfill previous legal commitments

• • influenced about structural decisions
• • ex: depreciation, rent

discretionary (managed): set at a fixed amount each period at management’s discretion
– ex: advertising, r&d, maintenance

Question 18

What is cost estimation?

Answer 18

determination of the relationship between activity and cost

Question 19

What are the methods used in cost estimation?

Answer 19

1) high-low
2) scatter
3) least-square regression

Question 20

When is the average cost graph useful?

Answer 20

if you want to know the cost of serving a customer

Question 21

What are the problems in cost estimation?

Answer 21

1) changes in technology and prices
- - need to use the same in both
2) matching activity and costs
- - actual costs not known until future
- - shorter timer periods have more error
3) identifying activity cost drivers
- - need to have logical and causal relationship

Question 22

What is the manufacturing cost hierarchy?

Answer 22

4 levels of activities with separate cost driver for each level

1) unit-level
2) batch-level
3) product-level: performed to support the production of each different type of product
4) facility-level: performed to maintain general manufacturing capabilities (usually fixed)

Question 23

What are the assumptions of CVP analysis?

Answer 23

1) all costs are either fixed or variable
2) TC and TR functions are linear in relevant range
3) single or multi-product mix analyses are constant
4) only one activity cost driver: unit- or dollar-sales volume

Question 24

Differentiate relevant and irrelevant costs.

Answer 24

Relevant: future costs that differ among competing decision alternatives

Irrelevant costs: future costs that do not differ

Question 25

What are outlay costs?

Answer 25

costs that require future expenditures of cash or other resources

Question 26

What are potential relevant costs in decision making?

Answer 26

• • differing future revenues
• • differing outlay costs
• • disposal/salvage values
• • opportunity costs

Question 27

What is the disposal value of an asset?

Answer 27

amount of cash an old asset can be sold for at the time a new asset is purchased
(earlier than salvage value)

Question 28

What is the salvage value of an asset?

Answer 28

amount of cash an asset will bring in at the end of its useful life

Question 29

What are the concerns with taking special orders?

Answer 29

1) time-span (cost increases)
2) variable long-term fixed costs
- - average full cost is VARIABLE in the long run

Question 30

What are the qualitative considerations of deciding whether to accept special orders?

Answer 30

1) impact on regular customers
2) potential long-term benefits from special order customer
3) legal factors (does buyer compete with regular customers)

Question 31

What is the theory of constraints? What is its goal?

Answer 31

every process has a bottleneck that limits rate of production

goal: maximize throughput (Revenue - DM)

Question 32

How should management deal with potential bottlenecks?

Answer 32

1) identify bottlenecks
2) schedule production to maximize efficient use of bottleneck resource
3) schedule production to avoid inventory buildup
4) try to eliminate bottlenecks

Question 33

What is the customer profitability ratio?

Answer 33

Customer profitability / sales