CHAPTER LEARNING OBJECTIVES Show
After studying this chapter, you should be able to:
PREVIEW OF CHAPTER 20 An important purpose of management accounting is to provide management with relevant information for decision making. This chapter explains management's decision-making process, and a decision-making approach called incremental analysis. The content and organization of this chapter are as follows:  CHAPTER REVIEW Incremental Analysis
Decisions to Eliminate Unprofitable Business Segments
In order to conduct an effective an effective analysis, one should look at a segment margin income statement by segment or product line. The segment income statement is based on the contribution margin approach to an income statement. The contribution margin income statement is expanded to show the segment margin of each product line. To get the segment margin, one takes the contribution margin and subtracts out direct fixed costs of each of the particular segments to get the segment margin of each product line. A direct fixed cost is one that can be attributed to a specific segment of the business. Examples include a machine that produces only one type of product, a supervisor who is responsible for a specific division, and advertising aimed at a specific region or product line. Eventhough these costs are fixed, and thus independent of the number of units produced or sold, they relate to only one segment and thus could be avoided if the segment were eliminated. Unlike direct fixed costs that relate to a specific segment, common fixed costs are shard by multiple segments and thus will be incurred even if a segment is eliminated. In evaluating segment profitability, managers should focus on the segment margin rather than the bottom line profit margin. The segment margin tells managers how much incremental profit a segment generates that helps to cover common fixed costs and contribute to companywide profit. A product may not be profitable for a bottom line standpoint, but it could generate a positive segment margin which could help to cover common fixed costs. Another question managers must consider is to address whether the elimination of one segment will affect the cost and revenues of other segments. Lastly, managers need to consider whether any opportunity costs should be considered.
Direct materials, direct labour, and allocated fixed and variable manufacturing overhead are all relevant in a make-or-buy decisionTrue False
Plant capacity is not relevant in decision makingTrue False
Eliminating an unprofitable segment is always a good management decisionTrue False
Sunk costs are considered relevant when choosing among alternatives because they are differentialTrue False
Max Company has excess capacity. A customer proposes to buy 400 widgets at a special unit price even though the price is less than the unit variable cost to manufacture the item. Max should accept the special order if demand on other products is unaffectedTrue False
One incremental analysis decision is the allocation of limited resourcesTrue False
Which one of the following stages of the management decision-making process is properly sequenced?a) Evaluate possible courses of action; make decision. b) Review the actual impact of the decision; determine possible courses of action. c) Assign responsibility for the decision; identify the problem. d) Make a decision; assign responsibility.
a) Evaluate possible courses of action; make decision.
Which of the following statements about making decisions is correct?a) Only relevant financial information should be considered. b) All information should be considered in the final decision. c) Management should consider both relevant financial and non-financial information. d) Management accountants should provide the information, but they should not make recommendations. It is up to the managers to make decisions. (adsbygoogle = window.adsbygoogle || []).push({});
c) Management should consider both relevant financial and non-financial information.
Which one of the following is non-financial information that management might evaluate in making a decision?a) opportunity costs of a decision b) contribution margin c) the effect on profit of a decision d) the corporate profile in the community
d) the corporate profile in the community
Which of the following statements about incremental analysis is true?a) It cannot be used if more than two alternatives are available. b) It considers only cost factors, not revenue. c) Its focus is on the past activities. d) It only considers factors that are different for each alternative, and only those factors that will occur in the future.
d) It only considers factors that are different for each alternative, and only those factors that will occur in the future.
For which of the following decisions is incremental analysis not appropriate?a) elimination of an unprofitable segment b) determining cost behaviour c) a make or buy decision an allocation of limited d) resource decision
b) determining cost behaviour
For which of the following is incremental analysis appropriate?a) Acceptance of a special order and a make or buy decision. b) A retain or replace equipment decision and CVP analysis. c) A sell or process further decision and allocation of indirect costs. d) Elimination of an unprofitable segment and allocation of indirect costs.
a) Acceptance of a special order and a make or buy decision.
M&H Ltd. has sufficient capacity to fill an order at a special price below its usual price. The special price exceeds its variable costs. What non-financial factors should also be considered in the decision?a) Is there the potential for additional sales to the customer in the future? b) How will existing customers respond if they find out about the special price? c) If there is the potential for additional sales to the customer in the future, can a higher price be charged? d) All of the above.
When a company does not have sufficient capacity to fill an order for less than the current selling price, what additional factor must be taken into consideration?a) The decision process is the same whether there is sufficient capacity or not. b) How will the lack of capacity affect the quality of the product? c) Can resources be transferred from producing product to sell at the current price to producing product at the special price? d) Opportunity costs.
When making a decision to accept a special order, management must considera) the impact that additional manufacturing time will have on unit costs of its current products. b) whether the purchaser will accept additional high costs of a special order. c) whether a lower price will convince the purchaser to become a regular customer. d) whether capacity exists to meet the demand of the order.
d) whether capacity exists to meet the demand of the order.
When management has excess capacity available to it in the short run, which of the following would be the best path to follow?a) Consider ways to reduce its fixed costs. b) Consider accepting special orders. c) Consider outsourcing certain products. d) Consider mixing its product offerings in a new way.
b) Consider accepting special orders.
Which one of the following does not affect a make-or-buy decision?a) variable manufacturing costs b) opportunity cost c) incremental revenue d) direct labour
Meow Cat Toys utilizes Lincoln Fabrics by purchasing the fabric to cover toy mice for its mouse toy division. As it pertains to Lincoln Fabrics, what decision situation does this create?a) make or buy b) sell or process further c) relevant costing d) budgeting
In a sell or process further decision,a) management should process further as long as the incremental revenues from additional processing are greater than the incremental costs. b) the basic decision rule is: process further if the total processing costs exceeds the incremental revenue. c) it is better to process further rather than sell now if the sales price increases. d) the allocation of joint product costs is important and relevant.
a) management should process further as long as the incremental revenues from additional processing are greater than the incremental costs.
In a decision concerning replacing equipmenta) with new equipment, the book value of the old equipment can be considered an opportunity cost. b) or keeping it, the salvage value of the old equipment is a sunk cost in incremental analysis. c) with new equipment, old equipment which is not fully depreciated should always be replaced. d) any trade-in allowance or cash disposal value of existing assets is relevant to the decision to retain or replace equipment. (adsbygoogle = window.adsbygoogle || []).push({});
d) any trade-in allowance or cash disposal value of existing assets is relevant to the decision to retain or replace equipment.
What is the salvage value of old equipment considered to be?a) a relevant cost b) a non-incremental cost c) an opportunity cost d) a cost that is not differential
What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment?a) It is relevant since it increases the cost of the new equipment. b) It is not relevant since it reduces the cost of the old equipment. c) It is not relevant to the decision since it does not impact the cost of the new equipment. d) It is relevant since it reduces the cost of the new equipment.
d) It is relevant since it reduces the cost of the new equipment.
A company shoulda) eliminate any segment in which the contribution margin is less than the fixed costs that are unavoidable. b) eliminate an unprofitable product line as it will always increase the total profits of a company. c) eliminate an unprofitable product as fixed expenses allocated to the eliminated segment will likely be eliminated. d) identify the relevant costs in deciding whether to eliminate an unprofitable segment
d) identify the relevant costs in deciding whether to eliminate an unprofitable segment
How should that portion of fixed costs that are unavoidable be handled when making a decision on whether to eliminate an unprofitable segment?a) They should be subtracted from the contribution margin and if that results in a net loss, the segment should be eliminated. b) They should not be considered as they are not relevant. c) They should be allocated to other segments. If that causes a loss in another segment, that segment should be eliminated as well. d) Fixed costs are never relevant.
b) They should not be considered as they are not relevant. |
Which of the following are relevant in deciding whether to eliminate an unprofitable segment
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