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Accounting Exam 4
Terms in this set (49)
are costs that are relevant to a particular decision.
is expected future data that differs among alternatives.
are costs that do not affect the decision.
a cost that is incurred in the past and cannot be changed regardless of which future action is taken.
a method that looks at how operating income would differ under each decision alternative; leaves out irrelevant information.
A company that has little control over the prices of its products and services because its products and services are not unique or competition is intense.
A company that has control over the prices of its products and services because its products and services are unique and there is little competition.
Companies are Price-Takers for a product when:
Product lacks uniqueness, intense competition, pricing approach emphasizes target pricing.
Companies are Price-Setters for a product when:
Product is more unique, less competition, pricing approach emphasizes cost-plus pricing.
A method to manage costs and profits by determining the the target full product cost. Starts with the market price of the product(the price customers are willing to pay) and then subtracts the company desired profit to determine the maximum allowed target full product cost.
Revenue at market price-Desired Profit=Target Full Product Cost
Target Full Product Cost
The full cost to develop, produce, and deliver the product or service.
A method to manage costs and profits by determining the price. (When a company is a price setter)
Full Product cost + Desired Profit=Cost-Plus price3
occurs when a customer requests a one-time order at a reduced sale price.
Accept the special pricing order:
If the expected increase in revenues exceeds the expected increase in variable and fixed costs.
Reject the special pricing order:
If the expected increase in revenues is less than the expected increase in variable and fixed costs.
Do not drop product:
If the lost revenues exceed the total cost savings.
If the lost revenues are less than the total cost savings.
A factor that restricts production or sale of a product.
If the differential costs of making the product exceed the differential costs of outsourcing.
Do not Outsource
If the differential cost of making the product are less than the differential costs of outsourcing.
A cost of a production process that yields multiple products.
Sell an item as is
If the additional revenue from processing further is less than the additional cost of processing further.
Process an item further
If the additional revenue from processing further exceeds the additional cost of processing further.
An operational asset used for a long period of time.
The acquisition of a capital asset.
The process of planning to invest in long-term assets in a way that returns the most profitability to the company.
The process of ranking and choosing among alternative capital investments based on the availability of funds.
The comparison of the actual results of capital investments to the projected results.
Revenue generated from investment. Savings in operating costs. Residual value.
Initial investment (acquisition cost). Additional operating costs. Refurbishment, repairs, and maintenance.
A capital investment analysis method that measures the length of time it takes to recover, in net cash inflows, the cost of the initial investment.
If net cash inflows are equal: Payback=
Amount invested/Expected annual net cash inflow
Accounting Rate of Return (ARR)
A capital investment analysis method that measures the profitability of an investment. Average annual operating income/ Average Amount invested.
Average annual operating income/Average amount invested
AAR invest if
The expected ARR meets or exceeds the required rate of return.
ARR do not invest if
The expected ARR is less than the required rate of return.
A stream of equal cash payments made at equal time intervals.
Interest calculated only on the principal amount.
Interest calculated on the principal and on all previously earned interest.
Net Present Value (NPV)
A capital investment analysis method that measures the net difference between the present value of the investment's net cash inflows and the investment's cost (cash outflows).
Management's minimum desired rate of return on a capital investment.
Computes the number of dollars returned for every dollar invested, with all calculations performed in present value dollars. Present value of net cash inflows/ Initial investment.
Present Value of Net Cash Inflows/Initial Investment
Internal Rate of Return (IRR)
The rate of return, based on discounted cash flows, of a capital investment. The interest rate that makes the NPV of the investment equal to zero.
(IRR) Invest if
The IRR meets or exceeds the required rate of return.
(IRR) Do not Invest if
The IRR is less than the required rate of return.
Present Value of a lump sum=
Future Value X PV Factor for i=?%, n=?
Present Value of an annuity
Amount of each cash inflow X Annuity PV factor for i?%, n=?
If net cash inflows are unequal: Payback=
Full years+(Amount needed to complete recovery in next year/Net cash inflow in next year)
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