Decision making steps
1. define the decision task
2.identify alternative courses of action
3.collect relevant information and evaluate each alternative
4.select the preferred course of action
5. analyze and access decisions made
Sunk Cost
Arises from past decisions and cannot be avoided or changed. Irrelevant to future decisions. Fixed
An out-of-pocket cost requires a current and/or future outlay of cash.
True
A company has the choice of either selling 1,000 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $4.00 per unit. Alternatively, it could rebuild them with incremental costs of $1.00 per unit for mate
Sell the units as scrap. Sell as scrap: 1,000 units x $4 = $4,000
Rework: 1,000 units x ($8.00 - $1.00 - $2.00 - $1.50) = $3,500
The decision to accept additional business should be based on a comparison of the incremental (differential) costs of the added production with the additional revenues to be received.
True
Opportunity Cost
Is the lost benefit of choosing an alternative course of action.
Rocko Inc. has a machine with a book value of $50,000 and a five-year remaining life. A new machine is available at a cost of $85,000 and Rocko can also receive $38,000 for trading in the old machine. The new machine will reduce variable manufacturing cos
Yes, because income will increase by $23,000 in total. ($85,000) + $38,000 + $14,000(5) = $23,000
An additional cost that is incurred only if a particular action is taken is a(n):
Incremental cost.
A company paid $200,000 10 years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year. The company is considering using the machine in a new project that will have incremental revenues of $28,000
Sunk cost.
A cost that cannot be avoided or changed because it arises from a past decision, and is irrelevant to future decisions, is called a(n):
Sunk cost
Incremental costs should be considered in a make or buy decision.
True
A company expects its three departments to yield the following income for next year:
Compute the change to the company's total net income if Dept. S is eliminated.
$4,000 decrease
Benchmarking
Practice of comparing and analyzing company financial performance or position with other companies or standards.
Budget Report
Report comparing actual results to planned objectives; sometimes used as a progress report.
Budgetary Control
Management use of budgets to monitor and control company operations.
Controllable Variance
Combination of both overhead spending variances (variable and fixed) and the variable overhead efficiency variance.
Cost Variance
Difference between the actual incurred cost and the standard cost.
Efficiency Variance
Difference between the actual quantity of an input and the standard quantity of that input.
Favorable Variance
Difference in actual revenues or expenses from the budgeted amount that contributes to a higher income.
Fixed Budget
Planning budget based on a single predicted amount of volume; unsuitable for evaluations if the actual volume differs from predicted volume.
Fixed Budget Performance Report
Report that compares actual revenues and costs with fixed budgeted amounts and identifies the differences as favorable or unfavorable variances.
Flexible Budget
Budget prepared (using actual volume) once a period is complete that helps managers evaluate past performance; uses fixed and variable costs in determining total costs.
Flexible Budget Performance Report
Report that compares actual revenues and costs with their variable budgeted amounts based on actual sales volume (or other level of activity) and identifies the differences as variances.
Management by Exception
Management process to focus on significant variances and give less attention to areas where performance is close to the standard.
Overhead Cost Variance
Difference between the total overhead cost applied to products and the total overhead cost actually incurred.
Price Variance
Difference between actual and budgeted revenue or cost caused by the difference between the actual price per unit and the budgeted price per unit.
Quantity Variance
Difference between actual and budgeted revenue or cost caused by the difference between the actual number of units and the budgeted number of units.
Spending Variance
Difference between the actual price of an item and its standard price.
Standard Costs
Costs that should be incurred under normal conditions to produce a product or component or to perform a service. <i>(p. 901)</i>
Unfavorable Variance
Difference in revenues or costs, when the actual amount is compared to the budgeted amount, that contributes to a lower income.
Variance Analysis
Process of examining differences between actual and budgeted revenues or costs and describing them in terms of price and quantity differences.
Volume Variance
Process of examining differences between actual and budgeted revenues or costs and describing them in terms of price and quantity differences.
Balanced scorecard
Process of examining differences between actual and budgeted revenues or costs and describing them in terms of price and quantity differences.
Controllable Costs
Costs that a manager has the power to control or at least strongly influence.
Cost based transfer pricing
A transfer pricing system based on the cost of goods or services being transferred across divisions within the same company.
Cost Center
Department that incurs costs but generates no revenues; common example is the accounting or legal department.
Cycle efficiency
A measure of production efficiency, which is defined as value-added (process) time divided by total cycle time.
Cycle time
A measure of the time to produce a product or service, which is the sum of process time, inspection time, move time, and wait time; also called throughput time.
Departmental contribution to overhead
Amount by which a department's revenues exceed its direct expenses.
Departmental Income Statements
Income statements prepared for each operating department within a decentralized organization.
Direct Expenses
Expenses traced to a specific department (object) that are incurred for the sole benefit of that department.
Hurdle Rate
Minimum acceptable rate of return (set by management) for an investment.
Indirect Expenses
Expenses incurred for the joint benefit of more than one department (or cost object).
Investment Center
Center of which a manager is responsible for revenues, costs, and asset investments.
Investment Center Residual Income
The net income an investment center earns above a target return on average invested assets.
Investment center return on total assets
Center net income divided by average total assets for the center.
Investment turnover
The efficiency with which a company generates sales from its available assets; computed as sales divided by average invested assets
Joint cost
Cost incurred to produce or purchase two or more products at the same time.
Market based transfer price
A transfer pricing system based on the market price of the goods or services being transferred across divisions within the same company.
Negotiated transfer price
A system where division managers negotiate to determine the price to use to record transfers of goods or services across divisions within the same company.
Non value added time
The portion of cycle time that is not directed at producing a product or service; equals the sum of inspection time, move time, and wait time.
Profit Center
Business unit that incurs costs and generates revenues.
Profit Margin
Ratio of a company's net income to its net sales; the percent of income in each dollar of revenue; also called net profit margin
Responsibility accounting budget
Report of expected costs and expenses under a manager's control.
Responsibility accounting performance report
Responsibility report that compares actual costs and expenses for a department with budgeted amounts.
Responsibility accounting system
System that provides information that management can use to evaluate the performance of a department's manager.
Transfer Price
The price used to record transfers of goods or services across divisions within the same company.
Uncontrollable Costs
Costs that a manager does not have the power to determine or strongly influence.
Value added time
The portion of cycle time that is directed at producing a product or service; equals process time.
Avoidable expense
Expense (or cost) that is relevant for decision making; expense that is not incurred if a department, product, or service is eliminated.
Incremental Cost
Additional cost incurred only if a company pursues a specific course of action.
Relevant Benefits
Additional or incremental revenue generated by selecting a particular course of action over another.
Unavoidable Expense
Expense (or cost) that is not relevant for business decisions; an expense that would continue even if a department, product, or service is eliminated.
A report based on predicted amounts of revenues and expenses corresponding to the actual level of output is called a:
Flexible Budget
Standard Costs are:
Preset costs for delivering a product or service under normal conditions.
The difference between the actual cost incurred and the standard cost is called the:
Cost Variance
The difference between actual and standard cost caused by the difference between the actual quantity and the standard quantity is called the:
Quantity Variance
The difference between actual and standard cost caused by the difference between the actual price and the standard price is called the:
Price Variance