Managerial Accounting: Ch 23

Question 1

Manager decision making process

Answer 1

1. define the decision
2. identify alternatives
3. collect relevant information and evaluate alternatives
4. select the course of action
5. analyze and assess decisions made

Question 2

relevant information

Answer 2

information must relate to the future and differ among alternatives (both must be met)

Question 3

keys to analyzing business decisions

Answer 3

1. use incremental analysis to look at how operating income would differ between alternatives (ignore irrelevant information)
2. Focus on relevant revenues, costs, and profits (ignore sunk costs or information that doesn’t differ between alternatives)
3. use a contribution margin approach that separates variable and fixed costs

Question 4

sunk cost

Answer 4

arises from past decision and cannot be avoided or changed

Question 5

out of pocket costs

Answer 5

requires a future outlay of cash and is relevant for decisions

Question 6

opportunity costs

Answer 6

the potential benefit lost by taking an action instead of an alternative action

Question 7

avoidable costs

Answer 7

a cost that can be eliminated by choosing one action versus another - always relevant

Question 8

outsourcing

Answer 8

buying goods or services from an external supplier

Question 9

decision rule

Answer 9

select the alternative with higher income

Question 10

sales mix with constrained resources

Answer 10

company sells a mix of products and its production facilities are operating at or near capacity - management looks for the most profitable sales mix of products. The contribution margin per unit of constrained resource is used to find the best sales mix

Question 11

segment elimination decisions

Answer 11

segments with contribution margins less than avoidable fixed costs are candidates for elimination

Question 12

avoidable costs

Answer 12

eliminated when these segment is eliminated and include all variable costs and avoidable fixed costs

Question 13

unavoidable costs

Answer 13

remain even if the segment is eliminated - these costs are allocated to the remaining segments when a segment is eliminated (irrelevant)

Question 14

price takers

Answer 14

produce similar products to competitors, may not be brand name, heavy competition, and uses target costing

Question 15

price setters

Answer 15

produce unique products, product is branded, less competition, and uses cost plus pricing

Question 16

target costing

Answer 16

when competition is high, companies might be price takers and have little control in setting prices (prices set by market forces)

Question 17

cost plus pricing

Answer 17

used by price setters - price decided by company