Special Decisions (6-7)
This term describes costs that will be eliminated if a specific course of action, such as dropping a product line, is undertaken
What are avoidable costs?
This capital budgeting method is often criticized for ignoring the time value of money and cash flows beyond the recovery date
What is the payback period?
These standards are developed under the assumption that factors like occasional machine breakdowns may lead to less than perfect performance
What are attainable standards?
This formula is determined by multiplying Profit Margin by Investment Turnover
What is Return on Investment (ROI)?
This type of accounting focuses on providing information to internal users for planning, control, and decision-making
What is managerial accounting?
A company can sell a partially completed product for $5,000. Alternatively, it can spend $2,000 to finish it and sell it for $8,000. This is the net advantage of finishing the product
What is 1,000? (8,000 - $5,000 incremental revenue - $2,000 cost).
An investment costs $60,000 and provides $12,000 in annual cash inflows. This is the payback period
What is 5 years? ($60,000 / $12,000).
1,000 lbs of material were purchased for $5.20/lb when the standard was $5.00/lb. This is the direct materials price variance
What is $200 Unfavorable? ([5.20 - $5.00] x 1,000)
A division has Net Operating Income of $120,000 and Invested Capital of $800,000. This is the ROI
What is 15%? ($120,000 / $800,000)
These costs are considered an asset (inventory) on the balance sheet until the finished goods are actually sold
What are product costs?
An order for 500 units is received at $20 each. Variable costs are $14, and the company must rent a special machine for $1,000 to complete the order. What is the incremental profit?
What is 2,000? (500 units times [20 - 14]) - $1,000.
A project costing $100,000 generates an average annual net income of $15,000. This is its Accounting Rate of Return
What is 15%? ($15,000 / $100,000)
A company used 2,200 lbs of material to make 1,000 units (Standard is 2 lbs/unit). If the standard price is $4/lb, this is the quantity variance
What is $800 Unfavorable? (200 extra lbs x $4).
A division with $500,000 in capital earns $70,000. If the required return is 12%, this is the residual income
What is 10,000? (70,000 - [$500,000 x 0.12])
Total fixed costs are $80,000, and the contribution margin per unit is $20. This is the break-even point in units
What is 4,000 units? ($80,000 / $20)
A product line has a contribution margin of $40,000 and direct fixed costs of $15,000. If this line is dropped, what is the total decrease in company profit?
What is 25,000? (40,000 - $15,000).
A project has a cost of $40,000, and the present value of future cash flows is $42,500. This is the Net Present Value
What is 2,500? (42,500 - $40,000).
Workers took 450 hours for a job that should have taken 400 hours. The standard rate is $15/hr. This is the labor efficiency variance
What is $750 Unfavorable? (50 extra hours x $15).
If Net Operating Income is $150,000 and the tax rate is 40%, this is the NOPAT
What is 90,000? (150,000 x [1 - 0.40]).
Estimated overhead is $200,000, and estimated direct labor hours are 10,000. This is the predetermined overhead rate
What is $20.00 per hour? (200,000 / 10,000).
A product has a variable cost of $10.00 and a shipping cost of $2.00. Allocated fixed overhead is $3.00, but only $1.00 of it is avoidable if the order is accepted. What is the minimum acceptable price?
What is $13.00? (10.00 VC + $2.00 shipping + $1.00 avoidable fixed)
*While fixed overhead is often irrelevant, any portion that is "avoidable" (meaning it is only incurred if the order is accepted) must be included in the minimum price
A company requires a 12% return. Using a present value annuity factor of 4.564, this is the maximum they should invest for a $5,000 annual return over 7 years
What is 22,820? (5,000 x 4.564)
A company budgeted 5,000 units but produced 5,500. With a fixed overhead rate of $2 per unit, this is the overhead volume variance
What is $1,000 Favorable? (500 extra units x $2).
A company has $10,000,000 in sales and an investment turnover of 2.0. This is the amount of invested capital
What is 5,000,000?(10,000,000 / 2.0)
A company wants a 20% profit on a product it expects to sell for $100. This is the target cost
What is $80.00? (100 - [$100 x 0.20])