Relevant Information, Pricing, Master Budget, Variance Analysis, MCS, Balanced Scorecard, and Transfer Pricing Flashcards

Flashcards testing core concepts of relevant decision making, pricing, budgeting, variance analysis, management control systems, balanced scorecards, segment reporting, and transfer pricing based on lecture notes.

What is the difference between differential cost and incremental cost?

Differential cost is the difference in total cost between two alternatives, whereas incremental cost refers specifically to the additional cost incurred or reduced benefit caused by choosing a proposed alternative.

What rule determines whether a cost is relevant to a decision?

A cost is relevant if it is an expected future cost (or benefit) that differs between the alternatives being considered.

Why was Nantucket Nectars advised to make its 12-ounce bottles internally rather than buying them from a supplier at ${\$0.18}$ each?

Although the full manufacturing cost was ${\$0.20}$ per bottle, buying from the supplier would only eliminate ${\$0.17}$ per bottle of relevant costs (${\$170,000}$ total relevant make cost), leaving ${\$0.03}$ per bottle (${\$30,000}$) of unavoidable fixed overhead, resulting in a ${\$10,000}$ advantage to making.

In a make-or-buy scenario with alternative facility uses, which option yields the lowest relevant cost for Nantucket Nectars?

Buying the bottles and using the freed facility to manufacture other products, which yields a relevant result of $-{\$125,000}$ compared to $-{\$170,000}$ for making.

Why is it incorrect to drop a department simply because it shows an accounting loss?

Because a department with an accounting loss may still generate a contribution margin that helps cover common or unavoidable fixed costs that would continue even if the department is deleted.

How should products be ranked when production is constrained by a scarce resource / limiting factor?

Products should be ranked by their contribution margin per unit of the scarce resource, calculated as: $\text{Contribution per scarce resource} = \frac{\text{Contribution margin per unit}}{\text{Scarce resource units per unit}}$

In the Nike example with 10,000 machine hours available, why is Air Court chosen over Air Max despite having a lower contribution margin per pair?

Air Court produces 10 pairs per machine hour at ${\$20}$ contribution/pair, generating ${\$200}$ per machine hour, whereas Air Max produces 5 pairs at ${\$36}$ contribution/pair, generating only ${\$180}$ per machine hour.

What is the rule for deciding whether to sell a joint product at the split-off point or process it further?

Process further if the additional revenue generated after split-off is greater than the extra separable processing costs incurred; joint costs incurred prior to split-off are sunk and irrelevant.

Which equipment costs are relevant when deciding whether to keep or replace an existing machine?

The future operating costs, disposal value of the old machine, and acquisition cost of the new machine are relevant; the old machine's book value and depreciation are past costs and irrelevant.

In the General Dynamics obsolete inventory example, why is remachining parts preferred over scrapping them?

Remachining yields an excess of future revenue over future cost of ${\$20,000}$ (${\$50,000}$ revenue - ${\$30,000}$ cost) versus ${\$5,000}$ from scrapping, creating a net advantage of ${\$15,000}$; the historical cost of ${\$100,000}$ is irrelevant.

Why can unit relevant cost comparisons mislead managers when choosing between two machines?

Unit costs depend on production volume because fixed costs are spread over units; an option with higher fixed costs may look cheaper on a per-unit basis at high volume but turn out to be more expensive at lower volume.

What rule governs the decision to accept or reject a special sales order when spare capacity exists?

Accept the special order if the special revenue exceeds the relevant additional costs incurred, provided regular sales are unaffected and total fixed costs do not increase.

In cost-plus pricing, how is the selling price calculated?

$\text{Selling Price} = \text{Cost} + \text{Markup}$ where $\text{Markup} = \text{Cost} \times \text{Markup \%}$

What are the advantages of using the contribution-margin approach over the absorption-cost approach for internal pricing decisions?

The contribution-margin approach separates variable and fixed costs, provides detailed CVP relationship insights, and allows managers to construct price schedules at different volume levels.

What formula is used to calculate budgeted inventory purchases in the master budget?

$$\text{Budgeted Purchases} = \text{Desired Ending Inventory} + \text{COGS} - \text{Beginning Inventory}$$

What is budgetary slack, and why does it occur?

Budgetary slack (or budget padding) is the intentional overstatement of budgeted costs or understatement of budgeted revenues by managers to create an easily achievable performance target.

What is the key difference between a sales forecast and a sales budget?

A sales forecast is a prediction of likely sales under expected conditions, whereas a sales budget is a target plan reflecting deliberate managerial decisions intended to achieve a desired sales level.

In Royal Company's master budget, how is direct labour cost calculated under its no-layoff policy?

Direct labour cost is calculated using the higher of the actual hours required for production or the guaranteed minimum of 1,500 hours per month, multiplied by the wage rate of ${\$10}$ per hour.

In Royal Company's cash budget, how much financing is required in April if cash before financing shows a deficiency of ${\$20,000}$ and a ${\$30,000}$ minimum cash balance is required?

Royal must borrow ${\$50,000}$ on April 1 to cover the ${\$20,000}$ deficiency and achieve the required ${\$30,000}$ ending cash balance.

What is the main limitation of evaluating performance by comparing actual results directly against a static budget?

A static budget is prepared for a single planned activity level; direct comparison blends cost-control performance with variations caused solely by changes in production or sales volume.

How is a flexible budget constructed for a given actual activity level?

$$\text{Flexible Budget Total Cost} = (\text{Variable Cost per Unit} \times \text{Actual Activity}) + \text{Total Fixed Cost}$$

What does the volume variance measure, and how is it calculated?

The volume variance measures the financial effect of achieving a different activity level than originally budgeted: $\text{Volume Variance} = (\text{Actual Volume} - \text{Budgeted Volume}) \times \text{Budgeted Contribution per Unit}$

What are the formulas for price variance and quantity variance in the general variance model?

$\text{Price Variance} = \text{AQ} \times (\text{AP} - \text{SP})$ and $\text{Quantity Variance} = \text{SP} \times (\text{AQ} - \text{SQ})$

In variance analysis, what is the difference between effectiveness and efficiency?

Effectiveness evaluates whether the organization achieved its overall target/goal (measured by comparing Master Budget to Flexible Budget), while efficiency evaluates how well resources were utilized at the actual activity level (measured by comparing Flexible Budget to Actual Results).

What is the difference between ideal standards and practical standards?

Ideal standards assume perfect operating conditions with zero waste, downtime, or breakdowns, whereas practical standards incorporate realistic allowances for normal waste, equipment downtime, and worker efficiency drops.

What is goal congruence in management control systems?

Goal congruence occurs when employees and managers, pursuing their own personal incentives, make decisions that align with and support the overall goals of the organization.

Why can relying solely on financial performance measures be problematic for management control?

Financial measures are often lagging indicators that reveal results only after events have passed, and they can encourage short-term decision-making at the expense of long-term capabilities like quality or customer satisfaction.

What are the three main types of responsibility centers, and what is each manager accountable for?

1. Cost Center: Accountable for costs only.
2. Profit Center: Accountable for revenues and costs (profitability).
3. Investment Center: Accountable for revenues, costs, and invested capital.

Are profit centers and decentralization the same concept?

No; profit centers refer to a type of responsibility accounting center, whereas decentralization refers to the extent of decision-making freedom delegated to lower-level managers.

What are the four perspectives of the Balanced Scorecard?

1. Financial
2. Customer
3. Internal Business Process
4. Learning & Growth

What role does a strategy map play in the Balanced Scorecard framework?

A strategy map visually illustrates the cause-and-effect chain linking objectives across the four perspectives, showing how learning and growth capabilities drive internal process improvements, customer satisfaction, and ultimate financial results.

How does the formula for Return on Investment (ROI) decompose into Return on Sales and Capital Turnover?

$$\text{ROI} = \frac{\text{Income}}{\text{Investment}} = \left(\frac{\text{Income}}{\text{Revenues}}\right) \times \left(\frac{\text{Revenues}}{\text{Investment}}\right) = \text{Return on Sales} \times \text{Capital Turnover}$$

How is Economic Profit (Residual Income) calculated, and why can it lead to better investment decisions than ROI?

$\text{Economic Profit} = \text{NOPAT} - (\text{WACC} \times \text{Average Invested Capital})$. It encourages managers to accept any project returning more than the cost of capital, whereas ROI evaluation may lead managers of high-ROI divisions to reject profitable projects if they lower the division's average ROI.

What is the general rule for determining the minimum acceptable transfer price from the selling segment's perspective?

$\text{Transfer Price} = \text{Outlay Cost} + \text{Opportunity Cost}$ where outlay cost is the additional variable production cost and opportunity cost is the contribution margin forgone by transferring internally.

Why is standard cost preferred over actual cost when setting cost-based transfer prices?

Transferring at actual cost allows the selling division to pass its production inefficiencies onto the buying division, whereas transferring at standard cost preserves the seller's incentive to control costs and gives the buyer a predictable price.