Q&A Hero

Q: A special order of goods or services should always be accepted when the incremental revenue exceeds the normal revenue.

Q: The concept of incremental cost is the same as the concept of differential cost.

Q: The cost of equipment purchased by a company last year would be an avoidable cost.

Q: Wages from a job a student gives up to attend summer school would be a sunk cost.

Q: Relevant benefits refer to the additional revenue generated by selecting a particular course of action over another.

Q: An out-of-pocket cost benefits a business, but is paid by an outside party.

Q: Most financial measures of revenues and costs from accounting systems are based on historical costs.

Q: An out-of-pocket cost requires a current and/or future outlay of cash.

Q: An opportunity cost is the potential benefit that is lost by taking a specific action when two or more alternative choices are available.

Q: __________________________ costs are amounts that will continue even if a segment is eliminated.

Q: __________________________ costs are amounts the company would not incur if a segment was eliminated.

Q: In a constrained resource situation, a company should maximize contribution margin per _______________________________.

Q: Costs already incurred in manufacturing the units of a product that do not meet quality standards are _________________________ costs.

Q: Impact on relationships with customers, company image, and employee morale are all examples of _________________________ decision factors.

Q: A cost-plus method of determining a products selling price adds a _________________________ to total product cost to reach a target price.

Q: In this chapter, you examined several short-term managerial decision tasks. Identify (list) any three of these types of decision tasks: _________________________ _________________________ _________________________

Q: A _____________________ arises from a past decision and cannot be avoided or changed; it is irrelevant to future decisions.

Q: An ______________________________ is the potential benefit lost by taking a specific action when two or more alternative choices are available.

Q: An ________________________ requires a future outlay of cash and is relevant for current future decision making.

Q: A local learning center is considering replacing the computers in its facility with thin client technology, thereby eliminating the need for individual computers at each station in the lab. The cost to purchase and install this new technology is $450,000 and it is projected to last for six years. The existing computers have a book value of $70,000 and a market value of $18,000 if they were to be sold. They expect to save a fair amount of money in maintenance costs and software upgrades if they go to the new technology. Required: a. What would the annual savings have to be in order to warrant the replacement of the existing computers with the thin client technology? b. What would the annual savings have to be in order to warrant the replacement of the existing computers with the thin client technology if the existing computers have no current market value?

Q: Doggy Day Park Inc. currently has a special tank used to provide exercise hydro therapy for the dogs. The current book value of the tank is $25,000 and they could sell it for $12,000 if they wanted to do so. Doggy is evaluating a new tank system that will provide additional therapy capability. The new tank will cost $55,000 and will save $7,500 per year in operating costs. The new tank system is expected to last six years. Required: a. Using incremental analysis, should they buy the new tank? Show calculations to support your answer. b. Will the answer to (a) change if they can only sell the old tank for $5,000? Why or why not?

Q: A company expects its three departments to yield the following income for next year: Dept. X Dept. Y Dept. Z Sales $94,000 $15,000 $70,000 Expenses Avoidable 71,000 2,000 52,000 Unavoidable 4,000 7,000 20,000 Total expenses 75,000 9,000 72,000 Net income (loss) $19,000 $6,000 $(2,000) Required: Compute the following independent calculations: a. The effect on total company income if Dept. X is eliminated. b. The effect on total company income if Dept. Y is eliminated. c. The effect on total company income if Dept. Z is eliminated. d. Should any of these departments be eliminated? Why of why not?

Q: A company expects its three departments to yield the following income for next year: Dept. O Dept. K Dept. W Sales $92,000 $15,000 $87,000 Expenses Avoidable 73,000 1,000 36,000 Unavoidable 2,000 8,000 37,000 Total expenses 75,000 9,000 73,000 Net income (loss) $17,000 $6,000 $14,000 Required: Compute the following independent calculations: a. The effect on total company income if Dept. O is eliminated. b. The effect on total company income if Dept. K is eliminated. c. The effect on total company income if Dept. W is eliminated.

Q: . A company produces three different products that all require processing on the same machines. There are only 17,000 machine hours available in each year. Production information for each product is: A B C Sales price per unit $22.00 $34.00 $46.00 Variable costs per unit $10.00 $19.00 $25.30 Machine hours necessary to produce one unit .75 1.2 2.3 Required: a. Determine the preferred sales mix if there are no market constraints on any of the products. b. Determine the preferred sales mix if the demand is limited to 7,000 units for each product. c. Determine the preferred sales mix if the demand is limited to 8,000 units for each product.

Q: A company has already incurred an $81,000 cost in partially producing its three products. Their selling prices when partially and fully processed are shown in the table below with the additional costs necessary to finish their processing. Based on this information, should any products be processed further? Product Unfinished Selling Price Finished Selling Price Further Processing Costs A $43.20 $81.10 $29.74 B $51.16 $85.73 $36.61 C $70.50 $97.22 $23.32

Q: A company has 33,000 units of its sole product that it produced last year at a cost of $71 each. This years model is superior to last years and the 33,000 units cannot be sold for their regular selling price of $127 each. The company has two alternatives for these items: (1) they can be sold to a wholesaler for $45 each, or (2) they can be reworked at a total cost of $700,000 and then sold for $53 each. The company has enough idle capacity to rework these items without affecting any new production. Which choice would increase the companys profits the most?

Q: Romulus Company has 21,000 units of its sole product that it produced last year at a cost of $67 each. This years model is superior to last years and the 21,000 units cannot be sold for their regular selling price of $102 each. Romulus has two alternatives for these items: (1) they can be sold to a wholesaler for $38 each, or (2) they can be reworked at a total cost of $258,000 and then sold for $73 each. The company has enough idle capacity to rework these items without affecting any new production. Which choice would increase the companys profits the most?

Q: Kimball Enterprises manufactures a product that contains a part that they have always purchased from a supplier for $60 each. Kimball recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the part instead of buying it. The company prepared the following per unit cost projections of making the part, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 75% of direct labor cost. Direct materials $38.00 Direct labor 00 Overhead (fixed and variable) 11.25 Total $64.25 The required volume of output to produce the parts will not require any incremental fixed overhead. Incremental variable overhead cost is $2 per unit. Should Kimball make or buy the parts?

Q: Walters Industries manufactures a product that contains part XYZ. The company has always purchased this part from a supplier for $70 each. Walters recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the part instead of buying it. The company prepared the following per unit cost projections of making the part, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 60% of direct labor cost: Direct materials $52.00 Direct labor 00 Overhead (fixed and variable) 9.60 Total $77.60 The required volume of output to produce the parts will not require any incremental fixed overhead. Incremental variable overhead cost is $4.50 per part. Should Walters make or buy the parts?

Q: Stone Company manufactures a product that contains a small lens. The company has always purchased this lens from a supplier for $17 each. Stone recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the lens instead of buying it. The company prepared the following per unit cost projections of making the lens, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 75% of direct labor cost: Direct materials $82 Direct labor 7.00 Overhead (fixed and variable) 5.25 Total $20.07 The required volume of output to produce the lenses will not require any incremental fixed overhead. Incremental variable overhead cost is $0.68 per lens. Should Stone Company make or buy the lenses?

Q: Contribution to overhead generated by a department is the same as gross profit generated by that department.

Q: Departmental contribution to overhead is the amount of revenues for that department less its direct expenses.

Q: The process of preparing departmental income statements starts with allocating service departments.

Q: A useful measure used to evaluate the manager of an investment center is return on total costs for the investment center.

Q: Investment center managers are responsible only for revenues and the costs of investment.

Q: Return on total assets for a cost center is a useful measure to evaluate the cost center manager.

Q: A joint cost of producing two products can be allocated between those products on the basis of the relative physical quantities of each product produced.

Q: In producing oat bran, the joint cost of milling the oats into bran, oatmeal, and animal feed is considered a direct cost to the oat bran, because the oat bran cannot be produced without incurring the joint cost.

Q: Joint costs can be allocated either using a physical basis or a value basis.

Q: Joint costs are a group of several costs incurred in producing or purchasing a single product.

Q: When a company has no excess capacity, the use of cost-based transfer pricing is preferred.

Q: A transfer price has no direct impact on a companys overall profits.

Q: The price that should be used to record transfers between divisions in the same company is called the divisional price.

Q: Responsibility performance reports usually compare actual costs to the budgeted costs amounts.

Q: Uncontrollable costs would continue even if a department were eliminated.

Q: Controllable costs are the same as direct expenses.

Q: A department's direct expenses can be entirely avoided if the department manager carefully controls and monitors operations.

Q: Generally, it does not matter how cost allocations are designed and explained, because most employees do not care whether the allocations appear to be fair or not.

Q: Advertising expense can be reasonably allocated to departments on the basis of sales.

Q: The concepts of direct expenses and controllable costs are essentially the same.

Q: Departmental wage expenses are direct expenses of that department.

Q: Direct expenses must be allocated across departments.

Q: Indirect expenses should be allocated to departments based on the benefits received by each department.

Q: Departmental accounting and responsibility accounting are related.

Q: Departmental information is important and always disclosed to the public as part of the company's annual report and footnotes.

Q: Evaluation of the performance of managers of profit centers assumes that the managers can control or influence both costs and revenue generation.

Q: Evaluation of the performance of a department involves only financial measures.

Q: Cycle time is the sum of _____________ plus ____________ plus __________ plus ______________.

Q: The ________________________________ is a system of performance measures, including nonfinancial measures, used to assess company and division manager performance.

Q: ________________________________ measures how efficiently an investment center generates sales from its invested assets.

Q: ________________________________ measures the income earned per dollar of sales.

Q: The ________________________________ is sales less direct expenses for a department.

Q: The investment center return on total assets is __________________________ divided by ______________________________.

Q: An _______________________ is a department whose manager is responsible for using the center's assets to generate income for the center.

Q: ___________________ are costs incurred to produce or purchase two or more products at the same time.

Q: A ______________________________ is the value used to record transfers of items between divisions of the same company.

Q: A ______________________________ accumulates and reports costs and expenses that a manager is responsible for, including budgeted amounts.

Q: Samm's Department Store operates three departments (A, B, and C). If total costs of $4,500 are to be allocated on the basis of square feet of space, (Dept. A = 1,500 sq. ft.; Dept. B = 900 sq. ft.; Dept. C = 600 sq. ft.) then Dept. A's share (in percent) of the $4,500 cost would be ________%; Dept. B would be ______%, and Dept. C would be __________%. The amount of cost allocated to Dept. C would be $__________.

Q: A __________________________ helps control costs and expenses and evaluates managers' performance by assigning costs and expenses to the managers responsible for controlling them.

Q: A _____________________________ provides information for managers to use to evaluate the profitability or cost effectiveness of each department's activities.

Q: A _______________________ incurs costs and generates revenues.

Q: Eleanor Reed, the manager of the Marinette Plant of the Wisconsin Company is responsible for all of the plant's costs except her own salary. There are two operating departments within the plant, Departments A and B, that each has their own managers. There is also a maintenance department that provides services equally to the two operating departments. The following information is available: Budget Actual A B Total A B Total Employee wages $ 3,500 $ 4,000 $ 7,500 $3,200 $ 4,700 $ 7,900 Department Managers salary 800 800 1,600 800 800 1,600 Supplies 750 600 1,350 700 590 1,290 Building rent 1,500 1,500 3,000 1,400 1,400 2,800 Utilities 300 300 600 375 375 750 Maintenance 3,300 3,300 6,600 3,000 3,000 6,000 Totals $10,150 $10,500 $20,650 $9,475 $10,865 $20,340 Each department manager is responsible the wages and supplies in their department. They are not responsible for their own salary. Building rent, utilities, and maintenance are allocated to each department based on square footage. Complete the responsibility accounting performance reports below that list costs controllable by the manager of Department A, the manager of Department B, and the manager of the Marinette plant.

Q: The China Department of the Coulsen Department Store had sales of $282,000, cost of goods sold of $198,750, indirect expenses of $19,875, and direct expenses of $41,250 for the current period. What is the China Department's contribution to overhead as a percentage of sales?

Q: The following data are available for the Cleaning Services Department of Amitol Co. Revenues $216,000 Cost of sales 168,000 Expenses: Supplies-direct 12,000 Salaries-indirect allocated 34,000 Rent-direct 8,000 Rent-indirect allocated 4,500 Required: Calculate departmental contribution to overhead for the Cleaning Services Department, including the department's contribution as a percentage of revenues.

Q: Vaughn Co. operates three separate departments (A, B, C). The data below are provided for the current year: Total sales $120,000 ($40,000 from each department) Cost of goods sold 80,000 ( 50% from A; 25% from B; 25% from C) Direct expense 26,000 ($6,000 from A; $12,000 from B; $8,000 from C) Indirect expenses 9,000 Required: Prepare an income statement showing the departmental contributions to overhead for the current year.

Q: Burien, Inc. operates a retail store with two departments, A and B. Its departmental income statement for the current year follows: BURIEN, INC. Departmental Income Statement For Year Ended December 31 Dept. A Dept. B Combined Sales $180,000 $200,000 $380,000 Direct expenses 129,900 142,870 272,770 Contributions to overhead $ 50,100 $ 57,130 $107,230 Indirect expenses: Depreciation--building 10,000 11,760 21,760 Maintenance 1,600 1,700 3,300 Utilities 6,200 6,320 12,520 Office expenses 1,800 2,000 3,800 Total indirect expenses $ 19,600 $ 21,780 $ 41,380 Net income $ 30,500 $ 35,350 $ 65,850 Burien allocates building depreciation, maintenance, and utilities on the basis of square footage. Office expenses are allocated on the basis of sales. Management is considering an expansion to a three-department operation. The proposed Department C would generate $120,000 in additional sales and have a 17.5% contribution to overhead. The company owns its building. Opening Department C would redistribute the square footage to each department as follows: A, 19,040; B, 21,760 sq. ft.; C, 13,600. Increases in indirect expenses would include: maintenance, $500; utilities, $3,800; and office expenses, $1,200. Complete the following departmental income statements, showing projected results of operations for the three sales departments. (Round amounts to the nearest whole dollar.) Dept. A Dept. B Dept. C Combined Sales $180,000 $200,000 _______ _______ Direct expenses 129,900 142,870 _______ _______ Contributions to overhead $ 50,100 $ 57,130 _______ _______ Indirect expenses _______ _______ _______ _______ Depreciationbuilding _______ _______ _______ _______ Maintenance _______ _______ _______ _______ Utilities _______ _______ _______ _______ Office expenses _______ _______ _______ _______ Total indirect expenses _______ _______ _______ _______ Net income _______ _______ _______ _______

Q: Renton Co. has two operating (production) departments supported by a number of service departments. The following information was collected for a recent period: Direct Costs Machining Assembly Indirect Department Department Cost Salaries $122,400 $ 85,700 $36,700 Insurance 20,200 11,000 5,500 Utilities 23,900 13,900 2,000 Depreciation 20,700 11,500 13,800 Maintenance 7,000 4,700 29,400 Office expenses -0- -0- 71,100 Cost of goods sold 327,600 121,200 Indirect costs are allocated as follows: salaries on the basis of sales, office expenses on the basis of the number of employees, and all other costs on the basis of square footage. Additional information about the production departments follows: Square Number of Footage Employees Machining 14,535 78 Assembly 4,845 52 Sales for the Machining Department are $724,404 and sales for the Assembly Department are $356,796. Determine the departmental contribution to overhead and the departmental net income for each production department.

Q: Bruce Wayne NI ($205,000-189,000) = 16,000 ($270,000-232,000) = $38,000 Average total assets $300,000 $290,000 Return on assets 5.3% 13.1% RI

Q: Alexander Bruce and Jonathon Wayne are managers of two product lines for Gotham Incorporated. One of them is a candidate for promotion based on performance. Using the following data: a. Calculate the residual income (assume a target income of 10% return on assets) and the investment center return on assets. b. Indicate which manager should be recommended for promotion and why. Bruce Wayne Revenue $205,000 $270,000 Costs 189,000 232,000 Average assets 300,000 290,000

Q: Laurel Hardy NI ($412,000-380,000) = 32,000 ($450,000-411,000) = $39,000 Average total assets $400,000 $600,000 Return on assets 8% 6.5%