Feedback from previous decisions uses historical information and, therefore, is irrelevant for making future predictions.

Past costs themselves are always irrelevant when making decisions.

Equal weight must be given to qualitative factors and quantitative nonfinancial factors while making decisions.

The rent paid for an already existing facility is an example of a sunk cost.

A cost may be relevant for one decision, but NOT relevant for a different decision.

Revenues that remain the same for two alternatives being examined are relevant revenues.

Sunk costs are irrelevant to decision making.

Marketing costs will be an irrelevant cost in the decision making of a one-time-only special order.

A sunk cost is a relevant cost in a decision making.

Quantitative factors, such as direct material costs, are outcomes that are measured in numerical terms.

Qualitative factors are outcomes that can be easily measured in numerical terms, such as the costs of direct labor.

Business function costs are the sum of all variable and fixed costs in all business functions of the value chain.

Qualitative factors, as well as relevant revenues and relevant costs need to be considered when selecting among alternatives.

Past costs are also called sunk costs because they are unavoidable and cannot be changed no matter what action is taken.

Full costs of a product include variable and fixed costs in a particular business function in the value

For one-time-only special orders, fixed costs may be relevant but NOT variable costs.

In the decision making of a one-time-only special order, it is assumed that accepting the special order is not expected to affect the selling price to other customers.

Bid prices and costs that are relevant for regular orders are the same costs that are relevant for one-time-only special orders.

Qualitative factors are important in the decision-making process even though they cannot be measured numerically

In a one-time special order situation, if the price offered by the buyer is less than the absorption cost per unit, the special order may still be profitable since absorption costs include allocated fixed manufacturing overhead.

In relevant-cost analysis, managers should not consider all variable as relevant and all fixed costs as irrelevant

An incremental product cost is generally a fixed cost.

If Option 1 costs $120 and Option 2 costs $90, then the differential cost is $30.

Variable cost per unit is the best product cost to use for one-time-only special order

Opportunity costs are not recorded in financial accounting systems because historical record keeping is limited to transactions involving alternatives that managers actually selected rather than alternatives that they rejected.

For decision making, differential costs assist in choosing between alternatives.

Differential revenue is the additional total revenue from an activity.

Differential revenue is the difference in total revenue between two alternatives.

Outsourcing is purchasing from outside vendors parts and other goods instead of producing your own and contracting for services instead of providing them yourself

Planet Furniture, Inc. is currently producing well below its full capacity. The Swansea Company has approached Plant with an offer to buy 5,000 tools at $17.50 each. Planet sells its end table for $18.50 each; the average cost per unit is $18.30, of which $2.70 is fixed costs. If Planet accepts the order, the increase in operating income will be $7,500

Outsourcing is risk free to the manufacturer because the supplier now has the responsibility of producing the part

Decisions about whether a producer of goods or services will insource or outsource are also called make-or-buy decisions

In a make-or-buy decision when there are alternative uses for capacity, the opportunity cost of idle capacity is relevant.

An incremental cost is the difference in total irrelevant costs between two alternatives

Under the opportunity-cost approach, the relevant cost of any alternative is the incremental of the alternative plus the opportunity cost of the profit foregone from choosing the alternative

When capacity is constrained, relevant costs equal incremental costs plus opportunity costs.

Incremental revenue is the sum of differential revenues of two alternatives

Under the opportunity cost approach, the cost of each alternative includes the incremental costs and the opportunity cost.

When capacity is constrained, the relevant revenues and costs of any alternative equal the incremental future revenues and costs plus the opportunity cost.

Product-mix decisions usually have only a short-run focus because they typically arise in the context of capacity constraints that can be relaxed in the long run

For short-run product-mix decisions, managers should focus on minimizing total fixed costs.

For short-run product-mix decisions, maximizing contribution margin will also result in maximizing operating income.

To maximize profits, managers should produce more of the product with the greatest contribution margin per unit of the constraining resource.

When there is a constraining resource, a firm should attempt to maximize sales of the product or service with the greatest contribution margin per unit.

The objective of the Theory of Constraints is to increase throughput margin while increasing investment in plant and equipment

The theory of constraints is more useful for the long-run management of costs since it takes a long-run perspective and focuses on improving processes by eliminating non-value-added activities and reducing the costs of performing value-added activities.

Throughput margin is equal to revenues minus direct materials and direct labor of the cost of goods sold.

Overhead costs allocated to the sales office and individual customers are always relevant when deciding whether to drop a customer.

Avoidable variable and fixed costs should be considered relevant when deciding whether to discontinue a product, product line, business segment, or customer.

Depreciation allocated to a product line is a relevant cost when deciding to discontinue that product.

In a decision as to whether or not to drop a product, fixed costs that have been allocated to that product are generally not relevant unless there is a savings of fixed costs as a result of dropping the product.

A company is considering adding a fourth product to use available capacity. A relevant factor to consider is that corporate costs can now be allocated over four products rather than only three.

When replacing an old machine with a new machine, the new machine's depreciation expense is relevant.

When replacing an old machine with a new machine, the book value of the old machine is a relevant cost.

Performance evaluation focuses on responsibility centers for a specific period, not on projects or individual items of equipment over their useful lives.

1.         The formal management control system includes the shared values, loyalties, and mutual commitments among members of the organization.

2.         Management control systems is designed only for top level managers and is not applicable to line managers.

3.         Management control systems utilize information gathered within a company and from external sources so as to aid management with their planning and control decision making.

4.         The human resources systems is a part of the formal management control systems of an organization

5.         The management accounting system is an informal management control system which provide information about the firm's costs, revenues, and income.

6.         The formal management control system includes shared values, loyalties, and mutual commitments among members of the company, company culture, and norms about acceptable behaviour for managers and other employees.

7.         Effort refers to physical exertion, such as a worker producing at a faster rate, but excludes non-physical aspects like acumen and diligence of a worker.

8.         An organization should design its management control system independently of its strategies, so that the system is not affected by change of strategies in future.

9.         Goal congruence exists when individuals work toward achieving one goal, and groups work toward achieving a different goal.

10.     Management control systems should be designed to support the organizational responsibilities of individual managers.

11.     Effort in terms of management control systems is defined in terms of physical exertion such as a worker producing at a faster rate.

12.     Effective management control systems should also motivate managers and other employees.

1.         Decentralization in multinational companies may lead to lack of control.

2.         An investment center is always a decentralized subunit.

3.         In a profit center, the manager is accountable for investments, revenues, and costs

4.         Decisions regarding sources of long-term financing are best made at subunit level as the subunit has local knowledge and can leverage it in negotiations

5.         Surveys indicate that decisions made most frequently at the corporate level are related to sources of supplies and products to manufacture

6.         The labels profit center and cost center are dependent on the degree of centralization or decentralization in a company

7.         Incongruent decision making occurs when individuals and groups work toward achieving the organization's goals even if departmental performance is adversely affected

1.        Transfer-pricing systems enable managers to focus on maximizing the performance of their subunits..

2.        The product or service transferred between subunits of an organization is called an intermediate product.

3.        The transfer price creates revenues for the selling subunit and costs for the buying subunit affecting each subunit's operating income

1.         The choice of a transfer-pricing method has minimal effect on the allocation of company-wide operating income among divisions.

2.         Transfer prices do not affect managers whose compensation is directly dependent on an organization's operating income because transfer prices affect only divisional profits and not the organization's profit

3.        Hybrid transfer prices take into account both cost and market information

4.         Hybrid transfer prices can be arrived at through negotiate

5.         Negotiated transfer prices are often employed when market prices are stable.

6.        The cost used in cost-based transfer prices can be actual cost or budgeted cost

1.        Cost-based transfer prices are often used when markets for the product are not competitive or when the quality of the internal product is different from the externally available products

2.        A major advantage of using actual costs for transfer prices is that often inefficiencies are NOT passed along to the receiving division

3.        The full cost plus a markup transfer-pricing method can sometimes lead to goal incongruence

4.        Cost-based transfer prices are helpful when markets are not perfectly competitive.

5.        When using transfer prices based on costs rather than market prices, management can better determine profitability of the investment made in the intermediate producing division

1.         The One advantage of prorating the difference between a maximum and minimum transfer price of a product to be moved between divisions is that it saves the cost of objective audits of transfer pricing.

2.         Dual pricing uses two separate transfer-pricing methods to price each transfer from one subunit to another

3.         One concern with dual pricing is that it leads to disputes about which price should be used when computing the taxable income of subunits located in different tax jurisdictions.

4.         Dual pricing insulates managers from the realities of the marketplace because costs, not market prices, affect the revenues of the supplying division

1.         Minimum transfer price can be arrived at by adding incremental cost per unit incurred up to the point of transfer with the markup required.

2.         Both the market-based transfer pricing approach and cost-based methods are useful for evaluating subunit performance

3.         The additional cost of producing and transferring the product or service is called variable manufacturing cost

4.         If the selling subunit is operating at capacity, the opportunity cost of transferring a unit internally rather than selling it externally is equal to the market price minus the variable cost.

Many common performance measures, such as customer satisfaction, rely on internal financial accounting information

Some companies present financial and nonfinancial performance measures for various organization units in a single report called the balanced scorecard.

The balanced scorecard in most organizations is broken down into the following categories: commercial perspective,suppli er perspective,externalbusi ness-process perspecti ve, and productivity perspecti ve

The first step in designing accounting based performance measures is to choose a target level of performance and feedback mechanism.

A major weakness of comparing two companies using only operating incomes as the basis of comparison is that it ignores the differences in the size of the investment and therefore any concept of yield or return on investment.

Reducing the investment base to improve ROI involves decreasing idle cash,paying down debt, determining proper inventory levels,and spending carefull y on long-term asset

Return on sales can provide how effectively costs are managed and is part of the DuPont method of profitability analysis.

Return on investment can be calculated by multiplying return on assets by investment turnover

All other things held constant,increase i n assets such as receivables or decrease in operating income results in an increase in return on investment

The DuPont method recognizes the two basic ingredients in profit making: increasing the income per dollar of revenues and using assets to generate more revenues

To evaluate overall performance,return on investment and residual income measures are more appropriate than return on sales.

Required rate of return multiplied by the investment is the weighted average cost of the investment

Historical costs are costs recognized in particular situations that are not usually recognized by accrual accounting procedures.

The objective of maximizing return on investment may induce managers of highly profitable divisions to reject proj ects that from the viewpoint of the overall organization should be accepted.

Return on investment, Residual income,or Economic value added measures are more appropriate than return on sales because they consider only the investment to measure the performance

Economic value added, unlike residual income,charges managers for the costs of their investments in long-term assets and working capital .

Companies that adopt the EVA concept define investment as total assets employed minus current liabil ities

In an EVA calculation, the corporate charge for a division's investment is based on a weighted average of the after-tax interest rate on the firm's debt and the cost of the firm's equity.

In an EVA calculation, the measure of the invested capital for a division would be that di vision' minus that division' s long-term liabil ities

In an EVA calculation, the appropriate measure of a division' s profit would be that division' operating income

The proponents of using net book value as an investment base maintain that it is less confusing because it is consistent with the amount of total assets shown in the conventional balance sheet

Current cost return on investment is a better measure of the current economic returns from a investment than historical cost return on investment.

The net present value of all cash flows over the life of an investment equals the net present value of the operating incomes.

Total assets employed includes all assets,regardless of their intended purpose.

Using net book value as an investment base will result in a lower ROI than using gross book value as an investment base

Historical-cost-based accounting measures are usually inadequate for evaluating economic returns on new investments and, in some cases, create disincentives for expansion

Inflation and fluctuations in foreign-currency exchange rates affect performance measurement.

Higher inflation will lead to higher prices for goods or services,which will increase a company' s operating income and lead to a higher ROI

To convert the operating income for an overseas branch into US dollars,the historical rate of exchange is used for its conversion into US dollars.

To calculate the value of fixed assets for an overseas branch,the historicalrate of exchange is used for its conversion

An important consideration in designing compensation arrangements is the tradeoff between creating incentives and imposing risks

There should be strict congruence between the performance evaluation of a subunit and the performance evaluation of that subunit's manager

A manager's job entails gathering information,interpreting that information and making judgments on that information and thus is less susceptible to moral hazards than jobs that require repetitive tasks and less subjective decision making.

The more owners have access to sensitive performance measures, the more they can rely on incentive compensation for their managers

The credit rating agencies require detailed disclosures of the compensation arrangements of top-level executives.

The salary component of compensation dominates when performance measures that are sensitive to managers' actions are not available.

An additional criticism of team-based compensation is that there can be problems managing team members who are not productive contributors to a team's success but who, nevertheless, share in the team's rewards

Stock options give executive the right to buy company stock at a specified price, called the exercise price,within a specified period.

"Cooking the books" means reporting of understated assets and overstated liabilities.

Intrinsic motivation comes from being given greater responsibility,doing interesting and creative work, and having pride in doing that work.

An excessive focus on diagnostic control systems and critical performance variables can cause an organization to ignore emerging threats and oppurtunities.

Some companies, make environmental performance a line item on every employee's salary appraisal report.

Interactive control systems are informal information systems managers use to focus the company' attention and learning on key strategic issues.

Measures which monitor critical performance variables that help managers track progress toward achieving a company's strategic goals are collectively called diagnostic control systems.