Questions week 4-5 Flashcards
- What is decentralization? Discuss the differences between centralized and decentralized decision making.
Decentralization is the delegation of decision making authority to lower levels. In centralized decision making, decisions are made at the very top level, and lower-level managers are responsible for implementing these decisions. For decentralized decision making, decisions are made and implemented by lower-level managers.
- What are two disadvantages of ROI? Explain how each can lead to decreased profitability.
Two disadvantages of ROI are: (1) ROI may discourage managers from investing in projects that would increase the profitability of the firm but decrease the division’s ROI. (2) It also may encourage managers to focus on short-run profitability and to take actions that may
harm long-run profitability.
- What is EVA? How does it differ from ROI and residual income?
EVA is economic value added. It is the difference between after-tax income and the cost of
the capital employed. EVA is an absolute dollar amount, not a percentage rate of return like ROI. EVA differs from residual income in EVA’s use of after-tax income and the true cost of capital (rather than a hurdle rate).
- What is a transfer price and the transfer pricing problem?
A transfer price is the price charged for goods that are transferred from one division to another division of the same company. The transfer pricing problem is finding a transfer price that simultaneously satisfies three objectives: accurate performance evaluation, goal congruence, and preservation of divisional autonomy.
- Identify three cost-based transfer prices. What are the disadvantages of cost-based transfer prices? When might it be appropriate to use cost-based transfer prices?
Full cost, full cost plus, variable cost plus. The major disadvantage is that cost-based transfer prices may not reflect the optimal outcome for the divisions and the firm. Specifically, it is possible for the transfer price, using one of the costing approaches, to be
less than the minimum price or greater than the maximum price. The prices, however, are simple to use and, in some cases, may reflect the outcome of a negotiated agreement.
- Explain what internal and external linkages are.
External linkages describe the relationship between a firm’s value chain and the value chain of its suppliers and customers. Internal linkages are relationships among the
activities within a firm’s value chain.
- What is the difference between a structural cost driver and an executional cost driver?
Provide examples of each.
A structural cost driver is a factor that drives costs associated with the organization’s structure, such as scale and scope factors. Examples include number of plants and management style. Executional cost drivers are factors that determine the cost of activities related to a firm’s ability to execute successfully. Examples include degree of employee participation and plant layout efficiency.
- What are the three viewpoints of product life cycle? How do they differ?
The three viewpoints of product life cycle are the marketing viewpoint, the production viewpoint, and the consumption viewpoint. They differ by the nature of the stages and the nature of the entity’s life being defined. The marketing viewpoint has a revenue-oriented viewpoint, the production viewpoint is expense oriented, and the consumption viewpoint is
customer value oriented.
- “Life-cycle cost reduction is best achieved during the development stage of the production life cycle.” Do you agree or disagree? Explain.
Agree. According to evidence, ninety percent of a product’s costs are committed during the development stage. Furthermore, $1 spent during this stage on preproduction activities can save $8–$10 on production and postproduction activities. Clearly, the time to manage activities is during the development stage.
- Explain why JIT with dedicated cellular manufacturing increases product costing accuracy.
Cells act as a “factory within a factory.” Each cell is dedicated to the production of a single
product or subassembly. Costs associated with the cell belong to the cell’s output. By decentralizing services and redeploying equipment and employees to the cell level, the quantity of directly attributable costs increases dramatically.
