Exam 4: Ch. 22-24

Question 1

Decentralization

Answer 1

Departmentalize; Unit managers make decisions and top management evaluates their performance

Question 2

Performance evaluation for the three responsibility centers

Answer 2

Cost: success in controlling actual costs
Profit: success in generating income
Investment: use of assets to generate income

Question 3

Cost center

Answer 3

Incurs costs without generating revenue, such as services and office salaries

Question 4

Profit center

Answer 4

Makes revenue and has costs. Usually product lines

Question 5

Investment center

Answer 5

Generates revenue and incurs costs but involves use of assets

Question 6

Responsibility accounting

Answer 6

Evaluates unit managers based on activities they can control

Question 7

Responsibility accounting performance report

Answer 7

Lists actual costs that a manager is responsible for and their budgeted amounts with analysis of differences. Higher level managers is less detailed

Question 8

Balanced scorecard

Answer 8

A system of performance measurement that collects information on several key performance indicators within each of four perspectives: customer, internal processes, innovation and learning, and financial

Question 9

Avoidable vs unavoidable costs

Answer 9

Avoidable- eliminated when segment goes
Unavoidable- remain when segment is eliminated

Question 10

Relevant costs

Answer 10

Out of pocket, opportunity, avoidable
Sunk cost- irrelevant

Question 11

Incremental

Answer 11

Incremental revenues- additional revenue from selecting a course of action over another
Incremental costs- additional costs from selecting a course of action
Incremental income=IR-IC

Question 12

Prepare departmental income statement

Answer 12

1. Accumulate sales, direct expenses, and indirect expenses by department.
2. Allocate indirect expenses to both service and operating departments.
3. Allocate service department expenses to operating departments.

Question 13

Special pricing

Answer 13

Prepare CM income statement and see if income increases

Question 14

Value basis of allocation of joint costs

Answer 14

Allocates joint cost in proportion to the sales value of the output produced by the process at the split off point

Question 15

Payback period benefits and costs

Answer 15

It uses cash flows, ignores time value of money, ignores cash flows after payback period

Question 16

ARR strengths and weaknesses

Answer 16

Uses income, easy to compute, ignores time value of money, doesn’t directly consider cash flows

Question 17

NPV strengths and weaknesses

Answer 17

Uses cash flows, reflects time value of money, reflects changing risks over projects life, difficult to compare projects

Question 18

IRR strengths and weaknesses

Answer 18

Uses cash flows, reflects time value of money, allows comparisons of projects, ignores changing risks over project’s life

Question 19

Break even time

Answer 19

When cumulative PV of net cash flows gets to zero

Question 20

Internal rate of return

Answer 20

Where the PV factor lines up with the number of periods, equals rate that yields a NPV of zero

Question 21

When would target costing be used

Answer 21

When competition is high and companies are price takers

Question 22

Capital budgeting definition

Answer 22

Process of analyzing long term investments and deciding which assets to acquire or sell

Question 23

Out of pocket cost

Answer 23

Required future outlay of cash

Question 24

Hurdle rate

Answer 24

Required rate of return, if IRR>Hurdle rate then invest