Final Review-09-10-2 TERM

Final Review – 09-10-2 Terms

1-6 The four generic elements of an organization’s value proposition are: ? Price—the price paid by the customer ? Quality—the degree of conformance between what the customer is promised and what the customer receives ? Functionality and features—the performance of the product ? Service—all other elements of the product relevant to the customer

1-7 An effective management accounting system should capture, track, and report value proposition measures that are leading indicators of financial performance. Examples of such measures include percentage of on-time deliveries, percentage of customer complaints, and defect rates.

2-1 Cost information is used in deciding whether to introduce a new product or discontinue an existing product (given the price and cost structure), assessing the efficiency of a particular operation, and budgeting. Cost information is also used for the valuation of inventory and cost of goods sold.

2-8 For external reporting, costs in a manufacturing firm are classified as product costs or period costs. The portion of product costs assigned to the products sold in a period appears as cost of goods sold expense in that period’s income statement; the remaining portion of product costs is assigned to the products in inventory and appears as an asset in the balance sheet. Period costs are expensed in the period incurred.

4-7 No, this statement is not correct. Activity-based costing systems use different cost drivers to better link the activities performed to the products manufactured. The reason they provide more accurate product costs is that they take into account the demand placed on a hierarchy of activities (for example, unit-level, batch-level, and product-level) by different products, not because they use more cost drivers. A system that uses many cost drivers that do not reflect the activity costs (such as a system that relies only on unit-related cost drivers) is also likely to distort product costs.

5-1 In evaluating the different alternatives from which managers can choose, it is better to focus only on the relevant costs that differ across different alternatives because it does not divert the manager’s attention with irrelevant facts. If some costs remain the same regardless of what alternative is chosen, then those costs are not useful for the manager’s decisions, as they are not affected by the decision. Therefore, it is better to omit them from the cost analysis used to support the decision.

5-5 No, fixed cost are not always irrelevant. For example, in comparing the status quo and a proposal to substantially increase the quantity of goods or services

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provided, additional fixed costs (that is, costs not proportional to volume) may be incurred to provide the increased quantity.

6-8 Yes. When capacity is fixed in the short run, the firm may need to sacrifice the production of some profitable products to make capacity available for a new order. The contribution margin on the production of profitable products sacrificed for a new order is an opportunity cost that must be considered to evaluate the profitability of the new order.

6-9 When surplus capacity is not available and overtime, extra shift, subcontracting, or other means must be employed to augment the limited capacity, a short-term pricing decision must consider the additional costs of overtime wages, supervision, heating, lighting, cleaning, security, machine maintenance and engineering, along with human factors such as a decline in morale.

9-15 The Balanced Scorecard is helpful in identifying critical processes because it forces the company to determine the means by which it will produce and deliver the value propositions for customers and achieve the productivity improvements for the financial objectives. Furthermore, the Balanced Scorecard includes objectives and measures to evaluate performance on these critical processes.

9-24 Because financial success is not their primary objective, nonprofit and government organizations (NPGOs) cannot use the standard architecture of the Balanced Scorecard strategy map where financial objectives are the ultimate, high-level outcomes to be achieved. NPGOs generally place an objective related to their social impact and mission, such as reducing poverty, school dropout rates, incidence or consequences from particular diseases, or eliminating discrimination, at the top of their scorecard and strategy map. A nonprofit or public sector agency’s mission represents the accountability between it and society, as well as the rationale for its existence and ongoing support.

10-19 Analysis of reasons for the variance between actual and estimated job costs can help managers in several ways. If the managerial actions that led to actual costs being lower than the estimated costs are identified, similar cost savings can be realized by repeating those actions in the production of other jobs. If factors resulting in actual costs being higher are identified, then managers may be able to take the necessary actions to eliminate or control those factors. If cost changes are likely to be permanent, however, the revised cost information can be used in revising standards for future variance analyses and in bidding for jobs in the future.

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