Chapter 13 - Differential Analysis: The Key to Decision Making

Some decisions have only one alternative and cannot consider steps in decision making.

• True

• False

False, every decision involves choosing from at least two alternatives, even if the alternatives are yes or no.

When making a decision ______ costs and benefits should to be included in the analysis.

• only opportunity

• all 

• only relevant

• only irrelevant

Only relevant, irrelevant costs and benefits should be ignored to save time and because incorporating them can lead to bad decisions.

Differential revenue is an example of a(n) ______ benefit.

• relevant

• avoidable

• sunk

• irrelevant

relevant, because it distinguishes two different alternatives

A cost that has already been incurred and cannot be avoided regardless of what a manager decides to do is referred to as a(n) _____ cost. (Enter only one word per blank.)

sunk, always irrelevant, should be ignored, and have no impact on future cash flows

Future costs and benefits that do not differ between alternatives are ______ costs to the decision-making process.

• sunk

• irrelevant

• relevant

• opportunity

irrelevant

The first step in decision making is to ______.

• identify relevant costs and benefits

• define the alternatives

• perform a differential analysis

define the alternatives, essentially dumb it down to simple choices (ex. make or buy)

The potential benefit given up when selecting one alternative over another is a(n) ______ cost.

• irrelevant

• sunk

• avoidable

• opportunity

opportunity, an opportunity given up when choosing one alternative over the other

Costs and benefits that should be ignored when making decisions are called ______ costs and benefits.

• relevant

• opportunity

• incremental

• irrelevant

• differential

irrelevant

When considering decision alternatives, both relevant and irrelevant costs are included when using the _____ cost approach. (Enter only one word per blank.)

total

Synonyms for differential costs include ______ cost. Select all that apply.

1. sunk

2. avoidable

3. incremental

4. irrelevant

(2) avoidable, (3) incremental

In order to prevent confusion and keep attention focused on critical information, it is desirable to ______.

• isolate relevant costs from irrelevant costs

• combine relevant and irrelevant costs to obtain a total cost

• ignore relevant costs and focus on irrelevant one

isolate relevant costs from irrelevant costs

Which of the following should not be included in the analysis when making a decision? Select all that apply.

1. avoidable costs

2. opportunity costs

3. non-differential future costs

4. sunk costs

(3) non-differential future costs, (4) sunk costs

Opportunity costs are not found in accounting records because they are not relevant to decisions.

• True

• False

False, opportunity costs are not found in accounting records because they are not cash outlays. Opportunity costs are relevant to decisions.

When a resource, such as space in the factory, has no alternative use, its opportunity cost is ______.

• not determinable

• infinite

• negative

• zero

zero, the resource has no alternative use, so there’s no opportunity cost.

When making a decision, irrelevant items are included in the analysis of both alternatives when using ______.

• neither the differential nor total cost approach

• both the differential and total cost approaches

• the total cost approach only

• the differential cost approach only

the total cost approach only

Isolating relevant costs is desirable because ______. (More than one answer may be correct.)

1. irrelevant costs may be used incorrectly in the analysis

2. managers prefer to see all costs and benefits associated with a decision

3. critical information may be overlooked with the total cost approach

4. all information needed for the total cost approach is rarely available

(1) irrelevant costs may be used incorrectly in the analysis, (4) all information needed for the total cost approach is rarely available

A company is considering buying a component part that they currently make using some existing equipment. Relevant costs to this sourcing decision include ______. (Select all that apply.)

1. allocated general overhead

2. variable overhead

3. outside purchase price

4. equipment depreciation charges

(2) variable overhead, (3) outside purchase price

Which of the following questions need to be considered in a special order decision? (Select all that apply.)

1. Is there idle capacity?

2. Are there opportunity costs?

3. Will the special order reduce normal sales?

4. Is the special order price equal or greater than the regular selling price?

(1) Is there idle capacity?, (2) Are there opportunity costs?, (3) Will the special order reduce normal sales?

When making a volume-trade off decision, managers should ignore ______.

• contribution margin

• fixed costs

• variable costs

fixed costs, the focus should be on maximizing contribution margin not ignoring it and variable costs are apart if it

If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is ______.

• zero

• the segment margin from the best alternative use of the resource

• the segment margin from the current use of the resource

the segment margin from the best alternative use of the resource

When there is a constrained resource, the best way to increase profits is to ______.

• decrease the capacity of the bottleneck

• increase the capacity of the bottleneck

• keep the capacity of the bottleneck the same

increase the capacity of the bottleneck, aka. relaxing (or elevating) the constraint, its benefits are often enormous

Two or more products produced from a common input are called ______.

• joint costs

• opportunity costs

• joint products

• intermediate products

joint products

When should a special order be accepted?

• When the incremental revenue from the special order exceeds the incremental costs of the order

• When the incremental costs from the special order exceeds the incremental revenue of the order

• Almost always, because it means more business and income, and will keep the employees productive

When the incremental revenue from the special order exceeds the incremental costs of the order

When a constraint exists, companies need to focus on identifying the ______.

• product mix that maximizes total operating profit

• products with the highest operating profit per unit

• product mix that maximizes total contribution margin

• products with the highest contribution margin per unit

product mix that maximizes total contribution margin, not #4 bc product mix must be considered when constraints exist, not just contribution margin per unit

When a constraint exists, managers can only increase profits by making the products with the highest contribution margin per unit of the constrained resource.

• True

• False

False, they can ALSO increase profits be increasing the bottleneck capacity