Module 4

Question 1

Unit activities

Answer 1

performed for each unit of product (quality control testing of wings)

Question 2

Batch activities

Answer 2

performed once per group of products, regardless of # of units in batch

Question 3

Product activities

Answer 3

performed for entire product line, regardless of units or batches produced (product design)

Question 4

Customer activities

Answer 4

performed for specific customers (creating the paint template)

Question 5

Organization activities

Answer 5

performed to provide ability to manufacture product (pay rent for warehouse)

Question 6

Steps to activity-based product costs

Answer 6

1. Identify activities
2. Develop activity cost pools
3. Calculate activity cost pool rates
   (Total costs in $ of activity pool / total volume of cost driver or activity pool)
4. Allocate costs to products or services
   (actual use of cost driver * activity cost pool rate)
5. Calculate unit product costs
   (total costs allocated / units produced)

Question 7

Calculate activity cost pool rates =

Answer 7

(Total costs in $ of activity pool / total volume of cost driver or activity pool)

Question 8

Allocate costs to products or services =

Answer 8

actual use of cost driver * activity cost pool rate)

Question 9

Calculate unit product costs =

Answer 9

(total costs allocated / units produced) = MOH/unit

Question 10

Total product cost per unit =

Answer 10

MOH/unit + DM + DL

Question 11

What are some ways we can identify non-value-added costs

Answer 11

1. Is the activity necessary to production process?

2. Is the activity efficiently performed?

Question 12

What are some common non-value-added costs for a manufacturing company?

Answer 12

1. Storage and handling
2. Inspecting
3. Testing
   * Note that some non value added costs cannot be eliminated. We should be able to manufacture w/o inspecting it, but we still should inspect for liability

Question 13

To be useful in decision making, information must be

Answer 13

1. Relevant
2. Accurate
3. Timely

Question 14

Relevant def

Answer 14

Pertains to the future and differs between alternatives

Question 15

Avoidable cost def

Answer 15

Costs that can be avoided if you stop a particular activity –Relevant

Question 16

Sunk cost def

Answer 16

costs incurred in the past that cannot be changed regardless of future actions
–Irrelevant

Question 17

Relevant cost decision model

Answer 17

1. What is the decision to be made?
2. What are the available alternatives?
3. What are the relevant revenues and costs?
4. Which alternative offers the greatest benefit or least cost?
5. What are the qualitative issues that must be considered?

Question 18

Should we accept or reject the special order?
Relevant info:
Decision Rule:
Watch out for:

Answer 18

Relevant info: -Costs to produce and sell the special order that would not be incurred without the special order
-Contribution margin lost on regular sales forfeited because of the special order
Decision Rule: -If we do have excess capacity, accept the special order if the lower special order sales price is enough to cover the relevant costs of filling the order
-If we do not have the excess capacity, accept the special order if the lower special order sales price is enough to cover both the relevant costs of filling the order and the reduction of normal sales
Watch out for: Unavoidable fixed costs

Question 19

Should we outsource certain operations or produce internally?
Relevant info:
Decision Rule:
Watch out for:

Answer 19

Relevant info: -Costs that would not be incurred if operations are outsourced
-Purchase price from external supplier
-Alternative use of resources
Decision Rule: -If purchase price is less than avoidable costs to produce, outsource
-If purchase price is more than avoidable costs to produce, continue to make the product in-house
Watch out for: Allocated or per unit fixed costs

Question 20

How should we allocate constrained resources among our product lines?
Relevant info:
Decision Rule:
Watch out for:

Answer 20

Relevant info: -Contribution margin per unit of constrained resources
-Demand for our various products
Decision Rule: -Maximize the contribution margin per unit of the constrained resource, not per unit of finished product
-Produce the product with the highest contribution margin per unit of constrained resource first, up to the quantity demanded by customers. Then produce the product with the second highest, and so on until the scarce resource is completely used up
Watch out for: Contribution margin per unit of product

Question 21

Should we keep or eliminate a losing segment or product?
Relevant info:
Decision Rule:
Watch out for:

Answer 21

Relevant info: -Segment contribution margin (what we would be losing if we eliminated)
-Direct fixed expenses (what we would be gaining if we eliminated)
-Contribution margin of complimentary operations or products (could go either way)
Decision Rule: Calculate what would be gained or lost by eliminating the segment
-If we’d have an overall loss by eliminating, keep the segment until a better use of resources is found
-If we’d have an overall gain by eliminating, then eliminate the segment
Watch out for: The effect os this decision on other operations or products and allocated common fixed coasts

Question 22

Advantages to decentralization

Answer 22

1. Empowerment = Job satisfaction
2. Executive team can focus on strategic, high-level decision
3. Allows management to utilize internal experts
4. More focused customer relations
5. Training ground for future top management

Question 23

Disadvantages to decentralization

Answer 23

1. Duplication of efforts and costs like HR, Finance, legal, etc
   - -Solution: centralized services
2. Self-serving segments might fail to see the big picture/long-term strategic plan
   - -Solution: balanced score-card

Question 24

Investment center

Answer 24

responsible for revenues, costs and capital (long term assets like stores or machinery) improvements

Question 25

Profit center

Answer 25

Responsible for profit only (revenue - cost)

Question 26

Cost center

Answer 26

Responsible for costs only

Question 27

Return on Investment (ROI) =

Answer 27

operating income / average total assets

Question 28

Residual Income (RI) =

Answer 28

Operating income - (average total assets * management’s target rate of return)