Chapter 4 Smartbooks (Cost)

Term
1 / 35
The process of estimating revenues and costs of alternative actions and comparing them to the status quo is called _____________ _____________
Click the card to flip 👆
Terms in this set (35)
The process of estimating revenues and costs of alternative actions and comparing them to the status quo is called _____________ _____________
differential analysis
The time value of money ______.

should be considered for both short and long run decisions
should not be considered in either short or long run decisions
is immaterial for short-run decisions
is immaterial for long-run decisions
is immaterial for short-run decisions
An advantage of the _____________ format is that, first, all the information is available so it is easy to derive the differential format if desired.

exponential
total
total
If a company is not operating at full capacity, accepting a(n) ________ __________from a customer will not affect other sales and is usually a short-run occurrence.
special order
Which of the following is NOT a short-run pricing decision?

Pricing a main product in a large market
Adjusting product mix and volume in a competitive environment
A one-time special order
Pricing a main product in a large market
Comparing alternative actions with the status quo in order to make decisions is the focus of ______.

cost-volume-profit analysis
long-run pricing
differential analysis
peak-run pricing
differential analysis
Given the following, a special order for 500 units @ $10 each should ______.

Sales (10,000 units @ $14 each) $140,000
Variable costs (10,000 units @ $8 each) $80,000
Total contribution margin $60,000
Allocated fixed costs $20,000
Operating profit $40,000

not be accepted because there will be no profit or loss
not be accepted because the loss will be $4 per unit ($2,000 total)
be accepted because the profit will be $2 per unit ($1,000 total).
be accepted because the profit will be $4 per unit ($2,000 total)
be accepted because the profit will be $2 per unit ($1,000 total).
Reason:
$10 selling price - $8 variable cost = $2 profit x 500 units = $1,000.
For convenience the short run is considered to be ______.

six months
one year
the remainder of the current calendar year
the remainder of the entity's fiscal year
one year
Using full costs for pricing decisions can be justified when a firm ______.
enters into a long-term contractual relationship to supply a product
accepts a one-time special order to supply a product that will not impact other sales
enters into a contract with a governmental agency to supply a product
enters into a long-term contractual relationship to supply a product
enters into a contract with a governmental agency to supply a product
When considering the differential costs versus total costs approach, the ______.

differential format is always preferred for short run decision
differential format can be derived from the total format
total cost approach provides information regarding total resources required
differential format can be derived from the total format
total cost approach provides information regarding total resources required
True or false: Differential costs are not impacted by the time period being analyzed. True FalseFalse Reason: Differential costs are much higher in the long run than they are in the short run.When considering a special order, full cost should be considered other sales must always be considered fixed costs may be irrelevantfixed costs may be irrelevant Reason: Fixed costs are only relevant if they change.Cradle to grave costing is another term for ______ costing. differential life-cycle target full cost-pluslife-cyclePricing a product in a market where there is considerable leeway in setting prices is an example of a(n) __________ - ___________ pricing decisionlong-runUsing "price-based costing" instead of "cost-based pricing" is the concept of ___________ ________________target costingGiven the following, a special order for 100 units @ $5 each will result in a (profit/loss) ______________ or $____________ from the special order. Sales (2,000 units @ $9 each) $18,000 Variable costs (2,000 units @ $4 each) $8,000 Total contribution margin $10,000 Allocated fixed costs $4,000 Operating profit $6,000profit 100Which of the following statements is true? A make-or-buy decision is almost always a simple, one-time choice. Some factors in a make-or-buy decision are not easily quantified. A make-or-buy decision should be based on lowest cost alone. A company that is vertically integrated relies on outside suppliers for many critical components in the value chain.Some factors in a make-or-buy decision are not easily quantified.When setting prices, most firms rely on ______. market conditions variable and fixed manufacturing costs only full cost information differential costsfull cost informationGiven the following, determine if a buy price for 3,000 units @ $4.00 per unit should be accepted or if the company should continue to make the 3,000 units. Direct materials ($1.00 per unit) $3,000 Labor ($1.60 per unit) $4,800 Variable overhead ($1.10 per unit) $3,300 Fixed overhead $1,500 Common costs $2,000 If the company buys the component, all of the variable costs and fixed overhead costs are differential. None of the common costs will be eliminated if the component is purchased. Based on price, the company should (make/buy) _________ the component at a net total advantage of $ ___________buy 600iven the following information, if the company is offered a buy price for 5,000 units @ $8.00 per unit, the company should ______. Direct materials ($3.00 per unit) $15,000 Labor ($2.40 per unit) $12,000 Variable overhead ($1.20 per unit) $6,000 Fixed overhead $10,000 Common costs $4,000 If the company buys the units, all of the variable costs are differential as is $1.00 per unit of fixed overhead. None of the common costs will be eliminated if the units are purchased. make the component because they will save $3,000 make the component because they will save $2,000 buy the component because they will save $7,000 make the component because they will save $7,000make the component because they will save $2,000 Reason: Variable costs $33,000 ($15,000 + $12,000 + $6,000) + $5,000 fixed costs* = $38,000 differential cost vs. $40,000 to buy or a $2,000 savings to continue to make the product. *$5,000 of the fixed cost is not differential.Differential costs ______. are the same for both long run and short run pricing never include fixed costs are used to set prices in governmental agency contracts may be approximated by full costs in the long runmay be approximated by full costs in the long runA company is considering whether to continue to make a component or buy it from an outside supplier. If they buy the component the manufacturing facility currently being used will be idle. If the company has no alternative use of the facility, the opportunity cost associated with this decision is ______. equal to the differential make cost zero equal to the difference between the buy price and the differential cost of making the product equal to the buy pricezeroEnvironmental regulations that require firms to "take back" and dispose of products have increased the importance of ______ costing. cost-plus target full life-cycle differentiallife-cycleGiven the following, if a company is offered a buy price for 2,000 units @ $5.00 per unit, the company ______. Direct materials ($1.25 per unit) $2,500 Labor ($2.00 per unit) $4,000 Variable overhead ($1.00 per unit) $2,000 Fixed overhead $1,000 Common costs $500 If the company buys the units, all of the variable costs are differential. None of the fixed overhead or common costs will be eliminated if the units are purchased. However, if the units are purchased the facilities that are no longer used will be used for another purpose which will provide a differential contribution of $2,500. should buy the component because they will save $2,500 will be indifferent between making and buying as there is no cost difference should buy the component because they will save $1,000 should make the component because they will save $1,500should buy the component because they will save $1,000 Reason: Variable costs ($2,500 + $4,000 + $2,000) = $8,500 + $2,500 opportunity cost = $11,000 vs. $10,000 to buy (2,000 units x $5.00).The estimated price that potential customers are willing to pay for a product or service is the ______. differential cost peak-load price target cost target pricetarget price Reason: A target cost is the estimated long-run cost of a product or service that will enable the company to achieve targeted profit.A diner is deciding whether to use its own ingredients to prepare meals or purchase frozen prepared items from a supplier. This is an example of a (n) ______. differential cost analysis opportunity cost analysis target costing decision make-or-buy decisionmake-or-buy decisionWhich of the following statements are correct? Product decisions may be limited by capacity in the short-run. The choice of which products and services to offer has little or no effect on costs. Determining what products or services to offer is a common managerial decision. Product choices are generally thought of as long-run decisions.Product decisions may be limited by capacity in the short-run. Determining what products or services to offer is a common managerial decision.When a company has a limited number of machine hours available each month, the limitation is known as a(n) __________constraintA company is considering whether to continue to make a component or buy it from an outside supplier. Because the company has no alternative use of the manufacturing facilities that are currently used to make the product, the _________ cost associated with the decision is zeroopportunitySanders, Inc. makes two products. Due to a limited availability of skilled labor hours, demand for the products exceeds production capability. In deciding how to allocate resources, Sanders' measure of profitability should be ______. operating profit per unit contribution margin per unit operating profit per direct labor hour contribution margin per direct labor hourcontribution margin per direct labor hourIn a make-or-buy decision, if a company has an alternative use of the facilities currently used to make the product, the opportunity cost of using the facility to continue to make the product is ______. the current contribution earned from making the product the differential contribution from the alternative use zerothe differential contribution from the alternative useProduct choices are generally considered to be ______ decisions. long-run short-runshort-run Reason: In the long-run, constraints on available capacity can be overcome, but choices are required in the short-run.When a company is unable to produce as much as demanded due to limited resources they are facing a(n) ______. constraint opportunity cost throughput limitationconstraintLarson, Inc. makes two products. Due to a limited number of available machine hours, demand for the products exceeds production capability. When allocating resources, Larson's measure of profitability should be ______. contribution margin per unit operating profit per unit contribution margin per machine hour operating profit per machine hourcontribution margin per machine hourWhich of the following statements are correct? Product decisions may be limited by capacity in the short-run. Determining what products or services to offer is a common managerial decision. Product choices are generally thought of as long-run decisions. The choice of which products and services to offer has little or no effect on costs.Product decisions may be limited by capacity in the short-run. Determining what products or services to offer is a common managerial decision