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45 Cards in this Set
- Front
- Back
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A BUSINESS SEGMENT WHOSE MANAGER HAS CONTROL OVER COST BUT HAS NO CONTROL OVER REVENUE OR INVESTMENTS IN OPERATING ASSETS...
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COST CENTER
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A BUSINESS SEGMENT WHOSE MANAGER HAS CONTROL OVER COST AND REVENUE BUT HAS NO CONTROL OVER INVESTMENTS IN OPERATING ASSETS...
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PROFIT CENTER
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A BUSINESS SEGMENT WHOSE MANAGER HAS CONTROL OVER COST, REVENUE, AND INVESTMENTS IN OPERATING ASSETS...
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INVESTMENT CENTER
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ANY PART OF AN ORGANIZATION WHOSE MANAGER HAS CONTROL OVER AND IS ACCOUNTABLE FOR COST, PROFIT, OR INVESTMENTS...
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RESPONSIBILITY CENTER
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A FIXED COST THAT SUPPORTS MORE THAN ONE BUSINESS SEGMENT, BUT IS NOT TRACEABLE IN WHOLE OR IN PART TO ANY ONE OF THE BUSINESS SEGMENTS...
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COMMON FIXED COST
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A FIXED COST THAT IS INCURRED BECAUSE OF THE EXISTENCE OF A PARTICULAR BUSINESS SEGMENT AND THAT WOULD BE ELIMINATED IF THE SEGMENT WERE ELIMINATED...
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TRACEABLE FIXED COST
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A SEGMENT'S CONTRIBUTION MARGIN LESS ITS TRACEABLE FIXED COSTS. IT REPRESENTS THE MARGIN AVAILABLE AFTER A SEGMENT HAS COVERED ALL OF ITS OWN TRACEABLE COSTS...
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SEGMENT MARGIN
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THE NET OPERATING INCOME THAT AN INVESTMENT CENTER EARNS ABOVE THE MINIMUM REQUIRED RETURN ON ITS OPERATING ASSETS...
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RESIDUAL INCOME
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A COST THAT CAN BE ELIMINATED (IN WHOLE OR IN PART) BY CHOOSING ONE ALTERNATIVE OVER ANOTHER IN A DECISION. THIS TERM IS SYNONYMOUS WITH RELEVANT COST AND DIFFERENTIAL COST...
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AVOIDABLE COST
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ANY COST THAT HAS ALREADY BEEN INCURRED AND THAT CANNOT BE CHANGED BY ANY DECISION MADE NOW OR IN THE FUTURE...
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SUNK COST
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A COST THAT DIFFERS BETWEEN ALTERNATIVES IN A DECISION...
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RELEVANT COST
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ANY COST THAT DIFFERS BETWEEN ALTERNATIVES IN A DECISION-MAKING SITUATION...
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DIFFERENTIAL COST
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A ONE-TIME ORDER THAT IS NOT CONSIDERED PART OF THE COMPANY'S NORMAL ONGOING BUSINESS...
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SPECIAL ORDER
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TWO OR MORE PRODUCTS THAT ARE PRODUCED FROM A COMMON INPUT...
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JOINT PRODUCTS
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THE PROCESS OF PLANNING SIGNIFICANT INVESTMENTS IN PROJECTS THAT HAVE LONG-TERM IMPLICATIONS SUCH AS THE PURCHASE OF NEW EQUIPMENT OR THE INTRODUCTION OF A NEW PRODUCT...
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CAPITAL BUDGETING
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THE TWO COMPONENTS OF CONTRIBUTION MARGIN...
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VARIABLE COSTS & REVENUES
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CASH, ACCOUNTS RECEIVABLE, INVENTORY, PLANT AND EQUIPMENT...
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OPERATING ASSETS
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INCOME BEFORE INTEREST AND TAXES...
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NET OPERATING INCOME
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WHAT IS MEANT BY THE TERM DECENTRALIZATION?
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IN A DECENTRALIZED ORGANIZATION, DECISION-MAKING AUTHORITY ISN'T CONFINED TO A FEW TOP EXECUTIVES, BUT RATHER IS SPREAD THROUGHOUT THE ORGANIZATION WITH LOWER-LEVEL MANAGERS AND OTHER EMPLOYEES EMPOWERED TO MAKE DECISIONS.
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DISTINGUISH BETWEEN A COST CENTER, A PROFIT CENTER, AND AN INVESTMENT CENTER.
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A COST CENTER MANAGER HAS CONTROL OVER COST, BUT NOT REVENUE OR THE USE OF INVESTMENT FUNDS. A PROFIT CENTER MANAGER HAS CONTROL OVER BOTH COST AND REVENUE. AN INVESTMENT CENTER MANAGER HAS CONTROL OVER COST AND REVENUE AND THE USE OF INVESTMENT FUNDS.
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WHAT IS A SEGMENT OF AN ORGANIZATION? LIST EXAMPLES.
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A SEGMENT IS ANY PART OR ACTIVITY OF AN ORGANIZATION ABOUT WHICH A MANAGER SEEKS COST, REVENUE, OR PROFIT DATA. EXAMPLES OF SEGMENTS INCLUDE DEPARTMENTS, OPERATIONS, SALES TERRITORIES, DIVISIONS, PRODUCT LINES, AND SO FORTH.
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WHAT COSTS ARE ASSIGNED TO A SEGMENT UNDER THE CONTRIBUTION APPROACH?
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UNDER THE CONTRIBUTION APPROACH, COSTS ARE ASSIGNED TO A SEGMENT IF AND ONLY IF THE COSTS ARE TRACEABLE TO THE SEGMENT (I.E., COULD BE AVOIDED IF THE SEGMENT WERE ELIMINATED). COMMON COSTS ARE NOT ALLOCATED TO SEGMENTS UNDER THE CONTRIBUTION APPROACH.
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DISTINGUISH BETWEEN A TRACEABLE COST AND A COMMON COST. GIVE EXAMPLES OF EACH.
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A TRACEABLE COST OF A SEGMENT IS A COST THAT ARISES SPECIFICALLY BECAUSE OF THE EXISTENCE OF THAT SEGMENT. IF THE SEGMENT WERE ELIMINATED, THE COST WOULD DISAPPEAR. A COMMON COST, BY CONTRAST, IS A COST THAT SUPPORTS MORE THAN ONE SEGMENT, BUT IS NOT TRACEABLE IN WHOLE OR IN PART TO ANY ONE OF THE SEGMENTS. IF THE DEPARTMENTS OF A COMPANY ARE TREATED AS SEGMENTS, THEN EXAMPLES OF THE TRACEABLE COSTS OF A DEPARTMENT WOULD INCLUDE THE SALARY OF THE DEPARTMENT'S SUPERVISOR, DEPRECIATION OF MACHINES USED EXCLUSIVELY BY THE DEPARTMENT, AND THE COSTS OF SUPPLIES USED BY THE DEPARTMENT. EXAMPLES OF COMMON COSTS WOULD INCLUDE THE SALARY OF THE GENERAL COUNSEL OF THE ENTIRE COMPANY, THE LEASE COST OF THE HEADQUARTERS BUILDING, CORPORATE IMAGE ADVERTISING, AND PERIODIC DEPRECIATION OF MACHINES SHARED BY SEVERAL DEPARTMENTS.
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WHAT IS MEANT BY THE TERM DECENTRALIZATION?
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IN A DECENTRALIZED ORGANIZATION, DECISION-MAKING AUTHORITY ISN'T CONFINED TO A FEW TOP EXECUTIVES, BUT RATHER IS SPREAD THROUGHOUT THE ORGANIZATION WITH LOWER-LEVEL MANAGERS AND OTHER EMPLOYEES EMPOWERED TO MAKE DECISIONS.
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DISTINGUISH BETWEEN A COST CENTER, A PROFIT CENTER, AND AN INVESTMENT CENTER.
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A COST CENTER MANAGER HAS CONTROL OVER COST, BUT NOT REVENUE OR THE USE OF INVESTMENT FUNDS. A PROFIT CENTER MANAGER HAS CONTROL OVER BOTH COST AND REVENUE. AN INVESTMENT CENTER MANAGER HAS CONTROL OVER COST AND REVENUE AND THE USE OF INVESTMENT FUNDS.
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WHAT IS A SEGMENT OF AN ORGANIZATION? LIST EXAMPLES.
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A SEGMENT IS ANY PART OR ACTIVITY OF AN ORGANIZATION ABOUT WHICH A MANAGER SEEKS COST, REVENUE, OR PROFIT DATA. EXAMPLES OF SEGMENTS INCLUDE DEPARTMENTS, OPERATIONS, SALES TERRITORIES, DIVISIONS, PRODUCT LINES, AND SO FORTH.
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WHAT COSTS ARE ASSIGNED TO A SEGMENT UNDER THE CONTRIBUTION APPROACH?
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UNDER THE CONTRIBUTION APPROACH, COSTS ARE ASSIGNED TO A SEGMENT IF AND ONLY IF THE COSTS ARE TRACEABLE TO THE SEGMENT (I.E., COULD BE AVOIDED IF THE SEGMENT WERE ELIMINATED). COMMON COSTS ARE NOT ALLOCATED TO SEGMENTS UNDER THE CONTRIBUTION APPROACH.
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DISTINGUISH BETWEEN A TRACEABLE COST AND A COMMON COST. GIVE EXAMPLES OF EACH.
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A TRACEABLE COST OF A SEGMENT IS A COST THAT ARISES SPECIFICALLY BECAUSE OF THE EXISTENCE OF THAT SEGMENT. IF THE SEGMENT WERE ELIMINATED, THE COST WOULD DISAPPEAR. A COMMON COST, BY CONTRAST, IS A COST THAT SUPPORTS MORE THAN ONE SEGMENT, BUT IS NOT TRACEABLE IN WHOLE OR IN PART TO ANY ONE OF THE SEGMENTS. IF THE DEPARTMENTS OF A COMPANY ARE TREATED AS SEGMENTS, THEN EXAMPLES OF THE TRACEABLE COSTS OF A DEPARTMENT WOULD INCLUDE THE SALARY OF THE DEPARTMENT'S SUPERVISOR, DEPRECIATION OF MACHINES USED EXCLUSIVELY BY THE DEPARTMENT, AND THE COSTS OF SUPPLIES USED BY THE DEPARTMENT. EXAMPLES OF COMMON COSTS WOULD INCLUDE THE SALARY OF THE GENERAL COUNSEL OF THE ENTIRE COMPANY, THE LEASE COST OF THE HEADQUARTERS BUILDING, CORPORATE IMAGE ADVERTISING, AND PERIODIC DEPRECIATION OF MACHINES SHARED BY SEVERAL DEPARTMENTS.
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EXPLAIN HOW THE SEGMENT MARGIN DIFFERS FROM THE CONTRIBUTION MARGIN.
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THE CONTRIBUTION MARGIN IS THE DIFFERENCE BETWEEN SALES REVENUE AND VARIABLE EXPENSES. THE SEGMENT MARGIN IS THE AMOUNT REMAINING AFTER DEDUCTING TRACEABLE FIXED EXPENSES FROM THE CONTRIBUTION MARGIN. THE CONTRIBUTION MARGIN IS USEFUL AS A PLANNING TOOL FOR MANY DECISIONS, INCLUDING THOSE IN WHICH FIXED COSTS DON'T CHANGE. THE SEGMENT MARGIN IS USEFUL IN ASSESSING THE OVERALL PROFITABILITY OF A SEGMENT.
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WHY AREN'T COMMON COSTS ALLOCATED TO SEGMENTS UNDER THE CONTRIBUTION APPROACH?
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IF COMMON COSTS WERE ALLOCATED TO SEGMENTS, THEN THE COSTS OF SEGMENTS WOULD BE OVERSTATED AND THEIR MARGINS WOULD BE UNDERSTATED. AS A CONSEQUENCE, SOME SEGMENTS MAY APPEAR TO BE UNPROFITABLE AND MANAGERS MAY BE TEMPTED TO ELIMINATE THEM. IF A SEGMENT WERE ELIMINATED BECAUSE OF THE EXISTENCE OF ARBITRARILY ALLOCATED COMMON COSTS, THE OVERALL PROFIT OF THE COMPANY WOULD DECLINE BY THE AMOUNT OF THE SEGMENT MARGIN BECAUSE THE COMMON COST WOULD REMAIN. THE COMMON COST THAT HAD BEEN ALLOCATED TO THE SEGMENT WOULD THEN BE REALLOCATED TO THE REMAINING SEGMENTS- MAKING THEM APPEAR LESS PROFITABLE.
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HOW IS IT POSSIBLE FOR A COST THAT IS TRACEABLE TO A SEGMENT TO BECOME A COMMON COST IF THE SEGMENT IS DIVIDED INTO FURTHER SEGMENTS?
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THERE ARE OFTEN LIMITS TO HOW FAR DOWN AN ORGANIZATION A COST CAN BE TRACED. THEREFORE, COSTS THAT ARE TRACEABLE TO A SEGMENT MAY BECOME COMMON AS THAT SEGMENT IS DIVIDED INTO SMALLER SEGMENT UNITS. FOR EXAMPLE, THE COSTS OF NATIONAL TV AND PRINT ADVERTISING MIGHT BE TRACEABLE TO A SPECIFIC PRODUCT LINE, BUT BE A COMMON COST OF THE GEOGRAPHIC SALES TERRITORIES IN WHICH THAT PRODUCT LINE IS SOLD.
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IN WHAT WAY CAN THE USE OF ROI AS A PERFORMANCE MEASURE FOR INVESTMENT CENTERS LEAD TO BAD DECISIONS? HOW DOES THE RESIDUAL INCOME APPROACH OVERCOME THIS PROBLEM?
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IF ROI IS USED TO EVALUATE PERFORMANCE, A MANAGER OF AN INVESTMENT CENTER MAY REJECT A PROFITABLE INVESTMENT OPPORTUNITY WHOSE RATE OF RETURN EXCEEDS THE COMPANY'S REQUIRED RATE OF RETURN BUT WHOSE RATE OF RETURN IS LESS THAN THE INVESTMENT CENTER'S CURRENT ROI. THE RESIDUAL INCOME APPROACH OVERCOMES THIS PROBLEM SINCE ANY PROJECT WHOSE RATE OF RETURN EXCEEDS THE COMPANY'S MINIMUM REQUIRED RATE OF RETURN WILL RESULT IN AN INCREASE IN RESIDUAL INCOME.
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INCREMENTAL COST...
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AN INCREMENTAL COST (OR BENEFIT) IS THE CHANGE IN COST (OR BENEFIT) THAT WILL RESULT FROM SOME PROPOSED ACTION.
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OPPORTUNITY COST...
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AN OPPORTUNITY COST IS THE BENEFIT THAT IS LOST OR SACRIFICED WHEN REJECTING SOME COURSE OF ACTION.
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ARE VARIABLE COSTS ALWAYS RELEVANT COSTS?
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NO. VARIABLE COSTS ARE RELEVANT COSTS ONLY IF THEY DIFFER IN TOTAL BETWEEN THE ALTERNATIVES UNDER CONSIDERATION.
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WHAT IS THE DANGER IN ALLOCATING COMMON FIXED COSTS AMONG PRODUCT LINES OR OTHER SEGMENTS OF AN ORGANIZATION?
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ALLOCATIONS OF COMMON FIXED COSTS CAN MAKE A PRODUCT LINE (OR OTHER SEGMENT) APPEAR TO BE UNPROFITABLE, WHEREAS IN FACT IT MAY BE PROFITABLE.
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HOW WILL RELATING PRODUCT CONTRIBUTION MARGINS TO THE AMOUNT OF THE CONSTRAINED RESOURCE THEY CONSUME HELP A COMPANY MAXIMIZE ITS PROFITS?
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ASSUMING THAT FIXED COSTS ARE NOT AFFECTED, PROFITS ARE MAXIMIZED WHEN THE TOTAL CONTRIBUTION MARGIN IS MAXIMIZED. A COMPANY CAN MAXIMIZE ITS CONTRIBUTION MARGIN BY FOCUSING ON THE PRODUCTS WITH THE GREATEST AMOUNT OF CONTRIBUTION MARGIN PER UNIT OF THE CONSTRAINED RESOURCE.
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JOINT COSTS...
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THE COSTS THAT ARE INCURRED UP TO THE SPLIT-OFF POINT.
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SPLIT-OFF POINT...
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THE POINT IN THE MANUFACTURING PROCESS WHERE JOINT PRODUCTS CAN BE RECOGNIZED AS INDIVIDUAL PRODUCTS.
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FROM A DECISION MAKING POINT OF VIEW, SHOULD JOINT COSTS BE ALLOCATED AMONG JOINT PRODUCTS?
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JOINT COSTS SHOULD NOT BE ALLOCATED AMONG JOINT PRODUCTS. IF JOINT COSTS ARE ALLOCATED AMONG THE JOINT PRODUCTS, THEN MANAGERS MAY THINK THEY ARE AVOIDABLE COSTS OF THE END PRODUCTS. HOWEVER, THE JOINT COSTS WILL CONTINUE TO BE INCURRED AS LONG AS THE PROCESS IS RUN REGARDLESS OF WHAT IS DONE WITH ONE OF THE END PRODUCTS. THUS, WHEN MAKING DECISIONS ABOUT THE END PRODUCTS, THE JOINT COSTS ARE NOT AVOIDABLE AND ARE IRRELEVANT.
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WHAT IS MEANT BY THE TERM TIME VALUE OF MONEY?
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THE "TIME VALUE OF MONEY" REFERS TO THE FACT THAT A DOLLAR RECEIVED TODAY IS MORE VALUABLE THAN A DOLLAR RECEIVED IN THE FUTURE. A DOLLAR RECEIVED TODAY CAN BE INVESTED TO YIELD MORE THAN A DOLLAR IN THE FUTURE.
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WHAT IS MEANT BY THE TERM DISCOUNTING?
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DISCOUNTING IS THE PROCESS OF COMPUTING THE PRESENT VALUE OF A FUTURE CASH FLOW. DISCOUNTING GIVES RECOGNITION TO THE TIME VALUE OF MONEY AND MAKES IT POSSIBLE TO MEANINGFULLY ADD TOGETHER CASH FLOWS THAT OCCUR AT DIFFERENT TIMES.
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WHY ARE DISCOUNTED CASH FLOW METHODS OF MAKING CAPITAL BUDGETING DECISIONS SUPERIOR TO OTHER METHODS?
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DISCOUNTED CASH FLOW METHODS ARE SUPERIOR TO OTHER METHODS OF MAKING CAPITAL BUDGETING DECISIONS BECAUSE THEY RECOGNIZE THE TIME VALUE OF MONEY AND TAKE INTO ACCOUNT ALL FUTURE CASH FLOWS.
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WHAT IS NET PRESENT VALUE? CAN IT BE NEGATIVE?
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NET PRESENT VALUE IS THE PRESENT VALUE OF CASH INFLOWS LESS THE PRESENT VALUE OF THE CASH OUTFLOWS. THE NPV CAN BE NEGATIVE IF THE PRESENT VALUE OF THE OUTFLOWS IS GREATER THAN THE PRESENT VALUE OF THE INFLOW.
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A DECISION TO CARRY OUT ONE OF THE ACTIVITIES IN THE VALUE CHAIN INTERNALLY, RATHER THAN TO BUY EXTERNALLY FROM A SUPPLIER...
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MAKE OR BUY DECISION
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