Final Flashcards

Question

Possible mistakes in Relevant Cost Analysis

Answer 1

Incorrect General Assumptions – i.e., all variable costs relevant and fixed costs irrelevant Including Irrelevant Costs Using same per unit fixed costs at different output levels

Answer 2

Decisions about whether a producer of goods or services will insource/outsource are called make or buy decisions Retention/monitoring of quality if we produce in-house Outsourcing allows focus on developing others products Reliance on suppliers is risky – costs, supply chain, quality

Answer 3

Incremental costs/revenues are the additional total costs/revenue incurred from an activity Differential costs/revenues are the difference in costs/revenues between two alternatives

Answer 4

Total Alternatives Approach evaluates the future costs and revenues for all products Opportunity Cost Approach evaluates the incremental costs and the opportunity cost (foregone profit) of other alternative

Answer 5

When it comes to replacing equipment, book value (Cost minus accumulated depreciation) is IRRELEVANT Relevant - disposal value of old machine, cost of new machine Irrelevant - Book value of old machine, loss on disposal of old machine

Answer 6

Customers - have an effect on demand for product/service; managers examine pricing decisions through eyes of customers Competitors - Managers need to be aware of actions of competitors; when competition exists, managers will attempt to learn the price of competitors Costs - lower production costs means managers will supply more, supply product as long as revenue from additional units exceeds costs, set prices that makes product attractive while maximizing operating income

Answer 7

Perfect Competition: little price control Monopoly: Total Cost Control Somewhere in Between: Value placed on product by customer, prices charged by competitors, costs influence supply

Answer 8

Long run pricing is a strategic decision designed to build long run relationships with customers - consistent price To charge a stable price in the long run, and earn the targeted return, managers must know and manage all future and indirect costs - need to cover product and period cost to get operating income

Answer 9

Provide information for economic decisions - choose price and quantity Motivate managers and other employees - goals, save and reduce costs Justify costs or compute reimbursement amounts Measure income and assets - reporting to financial documents

Answer 10

Market-Based: Answers the question “Given what customers want and how our competitors will react, what price do we charge” Cost-Based: Answers the question “Given what it costs us to make our products, what price do we charge that will recoup those costs and achieve a target return”

Answer 11

We already know how to do this for manufacturing costs! Since we need to know ALL costs, we need to determine per unit costs for non-manufacturing costs as well

Answer 12

Understand Customers’ Perceived Value Competitor Analysis Implement Target Pricing and Costing - Develop Product - Choose Target Price - Derive Target Cost - Perform Value Engineering

Answer 13

Target Operating Income per Unit is the operating income a company wants to gain per unit sold Target Operating Income is usually a function of a desired return on investment Target Operating Cost per Unit is the estimated long run cost that allows a company to achieve its Target Op. Income per Unit Target Op Cost per Unit = Target Price – Target Op Income per Unit

Answer 14

Systematic evaluation of all parts of the value chain Goal is to find areas to reduce costs and achieve acceptable quality

Answer 15

1. A Value-Added cost is a cost that, if eliminated, would reduce actual or perceived value of product/service 1. A non-value-added cost is a cost that, if eliminated, would not reduce the actual or perceived value of product or service 2. Cost Incurrence describes when a resource is consumed to meet a specific objective - when cost incurred 3. Locked-In Costs are costs that have not yet been incurred, but will be incurred in the future based on past decisions - not incurred but will be

Answer 16

Understand customer requirements and value vs. non-value added costs Anticipate how costs are locked in before they are incurred Use cross-functional teams to redesign products and processes to reduce costs/meet customer needs

Answer 17

Given what it costs us to make our products, what price do we charge that will recoup those costs and achieve a target return General formula for the cost-based approach is to add a markup to the product cost (also referred to as “cost plus”)

Answer 18

To determine the markup they place on the product, firms will again look at the target rate of return on investment Target Operating Income = Target Rate of Return x Investment Required Return Rate X Investment = TOI

Answer 19

Allows for calculation of “full recovery” of costs, and not just concerned with covering variable component Price Stability – limits ability of sales people to cut prices Simplicity – Don’t need to dig into as many pricing patterns to separate fixed and variable components

Answer 20

Predatory Pricing - act of deliberately pricing below costs to drive out competition in an effort to restrict supply, and then drive up prices, illegal in the US Collusive Pricing - occurs when companies in an industry conspire in pricing and product decisions to restrain trade, illegal under antitrust law Price Discrimination - practice of charging different customers different prices for the same goods or services, arises as a result of demand elasticity/inelasticity, legal as long as prices are justified and not intended to prevent competition International Pricing - prices charged in different countries may vary due to different economic and requalty factors, dumping is when a foreign company sells product in another country below market value, and harms industries in that country, countries could impose anti-dumping duty Peak Load Pricing - practice of charging a higher price for same service when demand approaches physical limit of capacity, when demand is high customers willing to pay more

Answer 21

Expand relationships with profitable customers Change behavior patterns of unprofitable customers Highlight that a small percentage of customers contributes a large percentage of operating income (Pareto Principle) - 80/20

Answer 22

Likelihood of customer retention Potential for Sales Growth Long-Run Customer Profitability Increases in overall demand from having “references” Ability to learn from customers

Answer 23

Cause and Effect: identify variables that cause resources to be used; likely most credible Benefits Received: identify beneficiaries of outputs of cost object, and allocate in proportion to benefits received (e.g., advertising) Fairness or Equity: Often used in gov’t contracts when cost allocations exists for establishing a “fair” price Ability to Bear: Allocate costs in proportion to the cost object’s ability to bear costs allocated to it

Answer 24

When it comes to determining items we care about, such as pricing, there are other indirect costs we need to consider, such as advertising, administration, R&D, etc. Allocating these costs, as well as the other customer specific costs we have been talking about give us a picture of fully allocated customer profitability

Answer 25

A Variance is the difference between actual results and expected performance (budgeted performance) A Favorable Variance has the effect of increasing operating income, relative to budget A Unfavorable Variance has the effect of decreasing operating income, relative to budget

Answer 26

the difference between the actual amount and the original budgeted amount

Answer 27

the difference between the actual amount and the amount from the flexible budget

Answer 28

the difference between the original budgeted amount and the amount from the flexible budget

Answer 29

the difference between budgeted contribution margin for the actual sales mix and the budgeted contribution margin for the budgeted sales mix 𝑆𝑎𝑙𝑒𝑠 𝑀𝑖𝑥 𝑉𝑎𝑟 = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝑈𝑛𝑖𝑡𝑠 𝑥 (𝐴𝑐𝑡𝑢𝑎𝑙 𝑀𝑖𝑥 % − 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑀𝑖𝑥 %) 𝑥 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛

Answer 30

he difference between budgeted contribution margin based on actual total units sold at the budgeted sales mix and the static budget CM 𝑆𝑎𝑙𝑒𝑠 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑉𝑎𝑟 = (𝐴𝑐𝑡𝑢𝑎𝑙 𝑇𝑜𝑡𝑎𝑙 𝑈𝑛𝑖𝑡𝑠 𝑆𝑜𝑙𝑑 − 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑇𝑜𝑡𝑎𝑙) 𝑥 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑀𝑖𝑥 % 𝑥 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐶𝑀 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡

Answer 31

the difference in budgeted contribution margin for actual market size (in units) caused solely by actual market share being different from budgeted market share 𝑀𝑎𝑟𝑘𝑒𝑡 𝑆ℎ𝑎𝑟𝑒 𝑉𝑎𝑟 = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑀𝑘𝑡 𝑆𝑖𝑧𝑒 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠 𝑥 (𝐴𝑐𝑡𝑢𝑎𝑙 𝑀𝑘𝑡 𝑆ℎ𝑎𝑟𝑒 − 𝐵𝑢𝑑𝑔𝑒𝑡 𝑀𝑘𝑡. 𝑆ℎ𝑎𝑟𝑒) 𝑥 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑊𝐴𝐶𝑀

Answer 32

the difference in budgeted contribution margin at budgeted market share caused solely by actual market size in units being different from budgeted market size in units 𝑀𝑎𝑟𝑘𝑒𝑡 𝑆𝑖𝑧𝑒 𝑉𝑎𝑟 = (𝐴𝑐𝑡𝑢𝑎𝑙 𝑀𝑘𝑡 𝑆𝑖𝑧𝑒 𝑖𝑛 𝑈𝑛𝑖𝑡𝑠 − 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑀𝑘𝑡 𝑆𝑖𝑧𝑒) 𝑥 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑀𝑘𝑡 𝑆ℎ𝑎𝑟𝑒 𝑥 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑊𝐴𝐶𝑀

Answer 33

Quantity Sold Price Discounts

Answer 34

Volume of product purchased Desire to sell to a certain customer Poor negotiating by the seller Unwanted effects of incentive plans