Exam 3 (ch 8, 9, 10, 11, 12)

Question 1

Relevant information

Answer 1

• Expected future (cost and revenue) data

* Differs among alternative courses of action

Question 2

Irrelevant information

Answer 2

• Costs that do not differ between alternatives

* Sunk costs (incurred in past and cannot be changed)

Question 3

Special order decisions

Answer 3

• A special order occurs when a customer requests a one-time order at a reduced sales price, often for large quantities.
• analyze impact on profit
• existing fixed costs may not be relevant

Question 4

pricing decisions

Answer 4

• Price taker = target costing

- Price setter = cost plus pricing

Question 5

target costing

Answer 5

= market price - desired profit

current cost target cost = find ways to reduce costs

Question 6

Cost Plus Pricing

Answer 6

= full cost + desired profit

• opposite of target costing

Question 7

Dropping a Product, etc.

Answer 7

does the product provide a positive contribution margin? (no = drop)
Will total company profits increase if product is dropped? (yes = drop)

Question 8

direct fixed expenses

Answer 8

would be eliminated if product is dropped

ex. product managers salary
- avoidable

Question 9

indirect fixed expenses

Answer 9

would remain even if product is dropped

ex. depreciation on factory building
- unavoidable common allocated costs

Question 10

Product Mix Decisions

Answer 10

• Emphasize the product with the highest contribution margin per unit of the constraint

Question 11

Outsourcing (Make or Buy?)

Answer 11

Incremental costs of making > incremental costs of outsourcing = outsource

Incremental costs of making

Question 12

opportunity costs

Answer 12

Benefit foregone by selecting an alternative course of action

Question 13

Sell as-is or Process Further?

Answer 13

Extra revenue (from processing further) > extra cost of processing further = process further

Extra revenue (from processing further)

Question 14

joint processing costs

Answer 14

not relevant

- sunk costs

Question 15

qualitative factors

Answer 15

may impact any types of decisions

special order, pricing, dropping a product, product mix, outsourcing, and sell as is or process further

Question 16

Capital Budgeting

Answer 16

process of making capital investment decisions

Question 17

Net cash inflows

Answer 17

most methods use net cash inflows rather than operating income
- cash inflows minus cash outflows

Question 18

payback period

Answer 18

• Length of time it takes to recover the initial cost

- used as a screening tool

Question 19

calculating payback period (if annuity)

Answer 19

• cash inflows are equal each year

- payback period = amount invested / expected annual net cash inflows

Question 20

calculating payback period (if not annuity)

Answer 20

• cash inflows are not equal each year
• you must accumulate net cash inflows until the amount invested is recovered (portion of last year may have to be calculated)

Question 21

Accounting Rate of Return (ARR)

Answer 21

only method that uses operating income instead of cash flows

Question 22

ARR =

Answer 22

average annual operating income / initial investment

Question 23

operating income and net cash inflows conversions

Answer 23

o If you are given net cash inflows, you must deduct depreciation expense to get operating income
o If you are given operating income, you must add back depreciation expense to get net cash flows (Payback, NPV, IRR)

Question 24

Future / present value of a dollar

Answer 24

lump sum

Question 25

future / present value of an annuity

Answer 25

series of equal periodic payments

Question 26

interest rate interchangeable terms:

Answer 26

hurdle rate, required rate of return, discount rate, minimum rate of return

Question 27

Net Present Value (NPV) Method

Answer 27

- determine and sum the present value of all net cash inflows - if positive or 0 -> acceptable - if negative -> not acceptable

Question 28

profitability Index

Answer 28

used to rank competing investments with acceptable NPV = PV / Investment Amount

Question 29

Internal Rate of Return (IRR) Method

Answer 29

the actual rate of return of an investment if an annuity formula the same as payback period

Question 30

actual rate of return expected on the investment

Answer 30

o NPV = 0 -> IRR = Required Rate of Return (acceptable) o NPV > 0 -> IRR > Required Rate of Return (acceptable) o NPV IRR

Question 31

Master Budget

Answer 31

• Comprehensive planning document for the entire organization - includes the operating budget and financial budget

Question 32

Operating Budget

Answer 32

* Budgets needed to run daily operations * Starts with the sales or revenue budget * Ends with budgeted income statement

Question 33

Financial Budget

Answer 33

* Projects collection and payment of cash (including capital expenditures) * Forecasts budgeted balance sheet

Question 34

Operating Budget Components

Answer 34

Sales budget, Production Budget, Direct Materials Budget, Direct Labor Budget, Manufacturing Overhead Budget, Operating Expense Budget, Budgeted Income Statement,

Question 35

Manufacturing Overhead Budget

Answer 35

- Separate sections for fixed and variable components | - includes non-cash expenses that must be added back to determine cash outflow

Question 36

Operating Expense Budget

Answer 36

* Period Costs - all value chain components except Production/Purchases * Both fixed and variable costs * Includes noncash items such as depreciation and bad debt expense

Question 37

Financial Budget Components

Answer 37

Cash Budget and Budgeted Balance Sheet

Question 38

Cash Budget

Answer 38

* Timing of cash inflows from sales * Sales made COD – Cash or collect on delivery; cash collected at time of sale * Sales made on account – collection may be in a later period

Question 39

Master Budget for Service and Merchandising Companies

Answer 39

* Sales Budget * Cost of Goods Sold, Inventory, and Purchases Budget * Operating Expense Budget * Budgeted Income Statement * Financial budgets are the same

Question 40

Price takers

Answer 40

- product lacks uniqueness - heavy competition - target costing - ex. natural resources, banking services

Question 41

price setters

Answer 41

- product is more unique - less competition - cost plus pricing - ex. jewelry, patented perfume scents, custom made furniture, branded items

Question 42

total target

Answer 42

revenue at market price less desired profit

Question 43

opportunity cost

Answer 43

the benefit foregone by not choosing an alternative course of action

Question 44

capital asset

Answer 44

will be used for a long period of time and involves a significant sum of money

Question 45

strategic planning

Answer 45

setting long term goals that extend 5-10 years

Question 46

rolling budget

Answer 46

continuously updated so that the next 12 months of operations are always budgeted

Question 47

static budgets

Answer 47

prepared for one level of sales volume

Question 48

flexible budget variance

Answer 48

difference between amounts in the flexible budget and actual amounts

Question 49

cost center example

Answer 49

maintenance department at continental airlines or the production department for XYZ manufacturing

Question 50

revenue center example

Answer 50

regional sales department for Xerox copiers

Question 51

disadvantage of decentralization

Answer 51

unit managers may not understand the big picture of the company

Question 52

management by exception

Answer 52

the practice of directing executive attention to important deviations from budgeted amounts

Question 53

Materials price variance

Answer 53

most useful in assisting the performance of the purchasing department

Question 54

materials effeciency variance

Answer 54

if a worker drops the raw materials and they must be discarded

Question 55

practical standard

Answer 55

provides allowances for normal waste and efficiency in the production process