Management Responsibilities Quiz

Questions and Answers

The key responsibilities of managers include:

(1) Deciding what the goals should be

(2) Deciding on the objectives that should be achieved to move towards the goal

(3) Tasks that need to be performed to achieve the goal

(4) Coordination of organizational activities

(1) and (2)

(1) and (3)

(1) and (4)

(1), (2), (3), and (4) (correct)

An organization’s control system is affected by the following facets of management control environment EXCEPT:

Nature of organisations

Rules, guidelines and procedures that govern the actions of the organisation’s members

Internal environment (correct)

The organisation’s culture

Rules, guidelines and procedures:

Influence the way people within the organization behave

Can be written or verbal

Can be formal and informal

All of these answers are correct (correct)

Organisational cultures are guided by:

(1) Tradition

(2) Internal Influences

(3) External Influences

(4) Attitudes of senior management and the Board of Directors (BOD)

(1), (3), and (4) Signup and view all the answers

The attitude of senior management will be reflected in the attitude of:

All of these answers are correct Signup and view all the answers

The key to control is:

Feedback Signup and view all the answers

_____________ Is the process of deciding on the programs the organisation will undertake and the approximate amount of resources to be allocated to each programme.

Strategic planning Signup and view all the answers

Control includes:

All of these answers are correct Signup and view all the answers

What information is needed to create a budget?

All of these answers are correct Signup and view all the answers

What are the basic functions of performance evaluation?

(1) to provide adequate feedback to each person on his or her performance

(2) to serve as a basis for modifying or changing behaviour toward more effective working habits

(3) to provide data to managers with which they may judge future job assignments and compensation.

(1), (2), and (3) Signup and view all the answers

Consider the following statements about goal congruence:

(1) Goal congruence is obtained when managers of subunits throughout an organization strive to achieve the goals set by top management.

(2) Managers are often more concerned about the performance of their own subunits rather than the performance of the entire organization.

(3) Achieving goal congruence in most organizations is relatively straightforward and easy to accomplish.

Which of the above statements is (are) true?

(1) and (2) Signup and view all the answers

A number of elements contribute to the quality of an organisation’s control environment. These may be used as indicators of the quality of an organisation’s internal control environment.

Which one of the following is not one of these elements?

Segregation of duties in management Signup and view all the answers

______ refers to a cost that can be identified with, or traced to, a particular cost object in an economic manner.

Direct cost Signup and view all the answers

_____ refers to a cost that cannot be identified with, or traced to, a cost object in an economic manner.

Indirect cost Signup and view all the answers

_____ refers to an item assigned a separate measure of cost.

Cost object Signup and view all the answers

_______ refers to the potential benefit that is given up when one alternative is selected over another.

Opportunity cost Signup and view all the answers

______ refers to all costs incurred in the past that cannot be changed by any decision made now or in the future.

Sunk cost Signup and view all the answers

If a manager can control or significantly influence the level of a cost, then that cost is classified as a ________

Controllable cost Signup and view all the answers

_____ refers to a cost that changes, in total, in direct proportion to a change in the level of activity.

Variable cost Signup and view all the answers

____ refers to a cost that remains unchanged in total despite changes in the level of activity.

Fixed cost Signup and view all the answers

The discipline that studies the behaviour of people in organisations is called _______.

Social psychology Signup and view all the answers

The cost of feeding 500 children in a public school cafeteria is $800 per day, or $1.60 per child per day. What economic term describes this $1.60

Average cost Signup and view all the answers

What economic term would be used to describe the cost of including one extra child in a day-care centre.

Marginal cost Signup and view all the answers

What economic term would be used to describe the cost of merchandise inventory purchased two years ago, which is now obsolete.

Sunk cost Signup and view all the answers

The cost of building an automated assembly line in a factory is $800,000. The cost of building a manually operated assembly line is $375,000. What economic term is used to describe the difference between these two amounts?

Differential cost Signup and view all the answers

The cost of building an automated assembly line in a factory is $800,000. The cost of building a manually operated assembly line is $375,000. What economic term is used to describe the $800,000 cost of building the automated assembly line?

Out-of-pocket cost Signup and view all the answers

What economic term would be used to describe the cost incurred by a mass customizer such as Dell Computer to produce one more unit in its most popular line of laptop computers.

Marginal cost Signup and view all the answers

____ refers to the increase in production costs generated by the production of additional product units.

Marginal cost Signup and view all the answers

_______ Is the process of deciding on the programs the organisation will undertake and the approximate amount of resources to be allocated to each programme.

Strategic planning Signup and view all the answers

_____ is a planning process expressed in quantitative, usually monetary, terms that covers a specified period of time, usually one year.

Budgeting Signup and view all the answers

What is the correct order of the "Phases of management control"?

(1) Budgeting

(2) Evaluation

(3) Measurement and reporting

(4) Strategic Planning

(4), (1), (3), and (2) Signup and view all the answers

What is the per unit fixed manufacturing overhead given fixed overhead of $150,000 and 25,000 units produced?

$6.00 per unit Signup and view all the answers

Which advantage of variable costing emphasizes its use in pricing decisions?

Easy to understand for management Signup and view all the answers

In what way does variable costing impact profit reporting compared to absorption costing?

Profit varies directly with sales volume Signup and view all the answers

What does management find beneficial about variable costing in relation to cost-volume-profit (CVP) analysis?

It simplifies the reporting process Signup and view all the answers

Which of the following is a disadvantage of variable costing?

Focuses solely on short-term profit Signup and view all the answers

Why might fixed manufacturing overhead be considered an important factor in profit evaluation?

It remains constant and impacts profit stability Signup and view all the answers

Which of these statements best describes contribution margin analysis in relation to variable costing?

It focuses on how sales affect profit Signup and view all the answers

What aspect of profit does variable costing emphasize that differs from absorption costing?

The impact of fixed manufacturing overhead on profit Signup and view all the answers

What does absorption costing primarily include as product costs?

Both fixed and variable production costs Signup and view all the answers

Which costing method assigns only variable costs to products?

Variable costing Signup and view all the answers

How do fixed costs relate to absorption costing?

They are considered part of the product costs Signup and view all the answers

What is a key distinction between absorption costing and variable costing?

Absorption costing includes fixed manufacturing costs in product costs Signup and view all the answers

What type of costs does variable costing emphasize?

Marginal costs and their behaviors Signup and view all the answers

Why might a company choose to use variable costing?

It facilitates better decision-making based on relevant costs Signup and view all the answers

Which component is NOT included in product costs under absorption costing?

Selling and administrative expenses Signup and view all the answers

In absorption costing, how are fixed costs treated during periods of lower production?

They are spread across fewer units, increasing per unit cost Signup and view all the answers

Which of the following costs can a profit center manager influence in approximately a year or less?

Data processing expenses Signup and view all the answers

What distinguishes full costing from variable costing?

Full costing includes fixed manufacturing costs in product cost. Signup and view all the answers

Which of the following is true about variable costing?

It separates fixed costs from variable costs. Signup and view all the answers

Which of the following statements about noncontrollable fixed costs is correct?

They consist of costs like depreciation and taxes. Signup and view all the answers

What is a key benefit of full costing when preparing financial statements?

It ensures compliance with GAAP. Signup and view all the answers

Which management objective is best met by variable costing?

Management control of cost behavior Signup and view all the answers

Which factor contributes to the use of full costing in product pricing?

It integrates fixed and variable costs for pricing decisions. Signup and view all the answers

Which aspect of full costing is particularly emphasized in financial reporting?

Absorption of fixed manufacturing costs into products Signup and view all the answers

In a decentralized organization, where are decisions primarily made?

At various departmental levels Signup and view all the answers

What does it mean for decisions to be pushed down in a decentralized decision-making structure?

Lower management has more authority to make decisions Signup and view all the answers

Which characteristic best describes a centralized organization?

Decisions are concentrated at the top of the hierarchy Signup and view all the answers

What is the primary disadvantage of a centralized decision-making approach?

Reduced responsiveness to local needs and conditions Signup and view all the answers

How does decentralization benefit lower-level managers in an organization?

They are directly involved in decision-making Signup and view all the answers

What aspect might hinder effective decentralization in an organization?

A lack of training for lower management on decision-making Signup and view all the answers

What is a key advantage of decentralization when it comes to decision-making?

Promotes quicker decision-making at local levels Signup and view all the answers

Which of the following statements about decentralized organizations is typically true?

They may lead to inconsistent decision-making across departments Signup and view all the answers

What impact does decentralization have on top management's involvement?

Decreases their involvement in operational aspects Signup and view all the answers

In terms of resource allocation, what is often a concern in decentralized organizations?

Effective usage of resources can be less monitored Signup and view all the answers

How is fixed manufacturing overhead treated under absorption costing?

It is treated the same as direct material and direct labor. Signup and view all the answers

What is a primary requirement for using absorption costing?

External reporting must adhere to specific laws. Signup and view all the answers

Which of the following statements is true regarding absorption costing?

It is suitable for assessing long-run pricing decisions. Signup and view all the answers

Which of the following is a disadvantage of not using absorption costing?

It may lead to underestimating product costs. Signup and view all the answers

What is the impact of external reporting requirements on costing methods?

Absorption costing is required for certain external reporting. Signup and view all the answers

What is the primary focus of relevant costing in decision-making?

Cost benefit comparisons between alternatives Signup and view all the answers

Which cost category refers to the potential benefit that is foregone when choosing one alternative over another?

Opportunity cost Signup and view all the answers

What distinguishes variable costing from absorption costing?

Variable costing assigns only variable costs to products Signup and view all the answers

In the context of manufacturing decisions, which aspect is essential when dealing with joint products and limited resources?

Selection based on incremental revenue and costs Signup and view all the answers

Which statement best defines the role of management accountants in the decision-making process?

To identify and analyze relevant information for management's decisions Signup and view all the answers

What is the primary focus of relevant costs in the context of special order decisions?

Incremental costs and benefits specific to the decision Signup and view all the answers

What characterizes unique decisions compared to repetitive decisions?

They arise infrequently or only once Signup and view all the answers

Which of the following costs is considered irrelevant when making special order decisions?

Sunk costs that have already been incurred Signup and view all the answers

What type of costs are typically considered when evaluating the feasibility of accepting a special order?

Incremental costs that will be incurred for the order Signup and view all the answers

In decision making, which term refers to the benefit foregone when an alternative option is chosen?

Opportunity costs Signup and view all the answers

What is a key characteristic of repetitive decisions?

They may rely heavily on historical data Signup and view all the answers

Which of the following best describes the capacity consideration for accepting a special order?

Idle capacity may be utilized if available Signup and view all the answers

What differentiates relevant information for unique decisions versus repetitive decisions?

Repetitive decisions draw heavily from historical information Signup and view all the answers

What is a common limitation that organizations face in resource management?

Fixed costs remaining constant Signup and view all the answers

When an organization is at maximum capacity for a specific resource, that resource is commonly referred to as what?

Bottleneck resource Signup and view all the answers

In decision-making involving limited resources, which factor is usually prioritized to maximize profitability?

Maximizing contribution margin Signup and view all the answers

What is the capacity of the lathe machine used in Martin, Inc.'s production?

2,400 minutes per week Signup and view all the answers

What factor should Martin, Inc. consider when deciding whether to produce Webs or Highs if the lathe is a constrained resource?

Contribution margin per minute of lathe usage Signup and view all the answers

Which statement about limited resource management is true?

Organizations may need to prioritize certain products over others. Signup and view all the answers

In the context of Martin, Inc., what does 'excess capacity on other machines' imply?

Ability to shift production to other machines Signup and view all the answers

What could be considered a bottleneck in production at Martin, Inc.?

The lathe operating at full capacity Signup and view all the answers

What costs should be considered when evaluating a special order in the presence of spare capacity?

Only the incremental costs associated with the order Signup and view all the answers

What should be the primary consideration when accepting a special order with excess incremental revenues?

Whether the incremental revenues exceed the incremental costs Signup and view all the answers

Which of the following best describes opportunity costs when there is no spare capacity?

The revenue lost from not fulfilling an alternate opportunity Signup and view all the answers

In the scenario provided, what is the contribution margin per unit for the special order?

$4.00 per unit Signup and view all the answers

What is the total increase in income from accepting the special order for 4,200 units?

$16,800 Signup and view all the answers

What type of costs do organizations consider when deciding to make a product versus buying it externally?

Both avoidable and unavoidable costs Signup and view all the answers

If an organization has no spare capacity, which of the following costs is relevant for decision-making regarding a special order?

The opportunity costs associated with regular production Signup and view all the answers

Which of the following factors is NOT considered relevant in the evaluation of a special order?

Fixed costs of producing the existing product Signup and view all the answers

What method is used to determine the allocation of joint products based on their sales value?

Relative Sales Value Method Signup and view all the answers

When considering the sale of cocoa powder, what additional cost arises if it is processed into instant cocoa mix?

$800 in further processing costs Signup and view all the answers

Based on the relative sales value method, when cocoa butter’s value is $750 and the total value for both products is $1,250, what percentage is assigned to cocoa butter?

60% Signup and view all the answers

If cocoa powder is not sold now but instead further processed, what should the company evaluate before this decision?

The expected increase in further processing costs Signup and view all the answers

What is a crucial consideration for the company when deciding whether to process cocoa powder into instant cocoa mix?

Incremental costs versus expected revenue Signup and view all the answers

If a product has a higher relative sales value, what implication does it have on cost allocation under the relative sales value method?

It receives a higher allocation of joint costs. Signup and view all the answers

What percentage of the joint product's total value does the cocoa powder represent if its sales value is $750 in a scenario with a total joint value of $1,250?

40% Signup and view all the answers

What decision should be prioritized based on the relative sales value method for joint products?

Optimizing allocation based on contribution margins Signup and view all the answers

What are direct costs primarily characterized by?

They can be easily traced to a specific product or department. Signup and view all the answers

Which statement correctly defines sunk costs?

Costs incurred in the past that cannot be altered by any future actions. Signup and view all the answers

How do controllable costs differ from direct costs?

Controllable costs can be significantly influenced by a manager, while direct costs are purely traceable. Signup and view all the answers

Which term best describes the benefit forgone when choosing one alternative over another?

Opportunity cost Signup and view all the answers

What is the primary effect of cost behavior analysis?

To predict how costs will change with different levels of business activity. Signup and view all the answers

What is not a facet of the management control environment?

Organisational hierarchy Signup and view all the answers

Goal congruence is best described as:

Alignment between the goals of individual managers and overall organizational objectives Signup and view all the answers

Why is it important for management control systems to ensure that the incentives of participants align with the organization's goals?

To improve the overall effectiveness and efficiency of the organization Signup and view all the answers

In the context of organizational culture, which of the following is true?

Organizational culture includes internal attitudes and traditions Signup and view all the answers

What is a characteristic of organizations as defined in the text?

An organization consists of individuals working towards shared goals Signup and view all the answers

What does contribution margin represent?

Total revenues minus total variable costs Signup and view all the answers

Goal congruence is best described as which of the following?

Aligning the goals of subunits with those of top management Signup and view all the answers

Which of the following best defines management control systems?

Influencing members to achieve organizational strategies Signup and view all the answers

When considering fixed overhead in absorption costing, what is a notable characteristic?

Fixed costs are included in product costs regardless of production levels Signup and view all the answers

Which element is NOT a phase of management control?

Execution Signup and view all the answers

What is a disadvantage of using variable costing?

It may misrepresent long-term profitability Signup and view all the answers

What is a key distinction between absorption costing and variable costing?

Variable costing treats fixed costs as expenses immediately Signup and view all the answers

Which of the following is true regarding variable costing?

It primarily focuses on variable production costs Signup and view all the answers

What are the components of manufacturing costs?

Direct materials, direct labor, and manufacturing overheads Signup and view all the answers

Which of the following best defines product cost?

The expenses assigned to a product for specific accounting purposes Signup and view all the answers

What type of costs does manufacturing overhead include?

Costs associated with production other than direct materials and direct labor Signup and view all the answers

How can direct materials be characterized?

Raw materials that can be conveniently traced to finished products Signup and view all the answers

Which factor does NOT contribute to manufacturing overhead?

Direct labor costs Signup and view all the answers

What can be deduced about the nature of product costs?

They consist of costs that can be allocated to specific products Signup and view all the answers

Which situation defines the categorization of a cost as direct labor?

Wages paid to assembly line workers Signup and view all the answers

In what context are indirect labor costs generally considered?

As part of product costs Signup and view all the answers

Which phase of management control directly involves deciding on the programs an organization will undertake?

Strategic Planning Signup and view all the answers

What is the primary focus of the evaluation phase in management control?

Assessing performance against objectives Signup and view all the answers

During which phase of management control are budgets typically prepared?

Budgeting Signup and view all the answers

Which phase of management control is essential for ensuring that operations are adjusted as needed?

Evaluation Signup and view all the answers

What is the sequence of the phases of management control?

Strategic Planning, Budgeting, Measurement and Reporting, Evaluation Signup and view all the answers

What key function does the measurement and reporting phase serve in management control?

It provides data for assessing the efficiency of operations. Signup and view all the answers

Which of the following is NOT a primary component of management control according to the phases outlined?

Historical Analysis Signup and view all the answers

In the context of management control, which statement best reflects the importance of information?

Effective management control relies on accurate and timely information. Signup and view all the answers

What is the role of strategic planning in the management control process?

To align resources with organizational goals. Signup and view all the answers

Which aspect of management control ensures that an organization remains adaptive to changing circumstances?

Evaluation Signup and view all the answers

What is the primary purpose of a contribution income statement?

To evaluate performance based on controllable costs Signup and view all the answers

Which of the following costs does Contribution by Profit Center (CPC) include?

Traceable fixed costs Signup and view all the answers

What is a significant advantage of using contribution income statements over full costing methods?

It excludes uncontrollable costs from the evaluation Signup and view all the answers

How does the contribution income statement address the issue of the ‘inventory effect’ found in full costing?

It eliminates inventory valuation from the evaluation process Signup and view all the answers

Which statement best describes the distinction between controllable and non-controllable costs within the contribution income statement framework?

Controllable costs are those that management can influence, whereas non-controllable costs cannot be altered by management. Signup and view all the answers

What is the primary characteristic of a decentralised organization?

Decisions made at various management levels Signup and view all the answers

Which of the following best describes decision-making in decentralised organizations?

Subordinates are responsible for executing decisions made at their level Signup and view all the answers

In a centralised organization, who is primarily responsible for decision-making?

Top management Signup and view all the answers

What is a potential drawback of a decentralised approach in decision-making?

Possibility of inconsistency in decisions Signup and view all the answers

How does a decentralised organisation structure influence the role of management?

Management delegates most decision-making responsibilities Signup and view all the answers

Which statement is true regarding decision-making in a decentralised organisation?

Decisions can be made by individuals closest to the relevant issue. Signup and view all the answers

What effect does decentralisation have on employee empowerment?

Encourages lower-level input and ownership Signup and view all the answers

Which of the following is NOT a characteristic of decentralised decision-making?

Consistent rules applied uniformly Signup and view all the answers

What is a key advantage of decentralisation in decision-making?

Reduction in managerial workload Signup and view all the answers

Decentralisation is often preferred in large organizations because it:

Enables quicker responses to local needs and conditions Signup and view all the answers

What is one benefit of decentralization in an organization?

Improves decision making autonomy Signup and view all the answers

What could be a potential cost of having a decentralized organization?

Lack of coordination Signup and view all the answers

How does decentralization affect employee motivation?

Increases motivation through autonomy Signup and view all the answers

In a decentralized organization, which challenge could arise?

Difficulties in transferring knowledge Signup and view all the answers

What is a common misconception about the benefits of decentralization?

It inherently promotes better coordination Signup and view all the answers

Which aspect of decentralization is most likely to empower employees?

Greater decision-making authority Signup and view all the answers

What impact does decentralization have on timely responses to problems?

Improves responses through localized decision-making Signup and view all the answers

Which of the following is a direct consequence of decision-making autonomy in decentralized organizations?

Greater managerial training opportunities Signup and view all the answers

What defining characteristic distinguishes absorption costing from variable costing?

Absorption costing includes both fixed and variable production costs. Signup and view all the answers

Which type of costs does variable costing primarily focus on?

Variable costs only Signup and view all the answers

In terms of product costing, how are fixed costs treated under absorption costing during periods of lower production?

They are absorbed into inventory costs. Signup and view all the answers

What advantage does variable costing provide in relation to cost-volume-profit (CVP) analysis?

It simplifies the calculation of contribution margin. Signup and view all the answers

Why might a company limit the use of variable costing in financial reporting?

It provides a more accurate representation of income under GAAP. Signup and view all the answers

What is a primary consideration when comparing profit reporting between absorption costing and variable costing?

Profit can fluctuate under absorption costing due to fixed costs being allocated to inventory. Signup and view all the answers

What is a disadvantage of using variable costing?

It can lead to lower reported profits in high inventory periods. Signup and view all the answers

What is one common misconception about absorption costing?

It can result in higher reported profits than variable costing. Signup and view all the answers

What is the treatment of selling and administrative expenses in unit product cost calculation?

They are always deducted from revenue. Signup and view all the answers

If Mellon Co. produced 25,000 units and sold 20,000 units at $30 each, what factor affects their cost reporting?

Beginning inventory levels. Signup and view all the answers

What is NOT included in the product costs under absorption costing?

Selling and administrative expenses. Signup and view all the answers

Which costing method assigns only variable costs to products?

Marginal costing. Signup and view all the answers

During periods of lower production, how are fixed costs treated under absorption costing?

They are allocated to each unit produced. Signup and view all the answers

What does variable costing emphasize that differs from absorption costing?

Contribution margin is highlighted. Signup and view all the answers

How does the treatment of fixed manufacturing overhead differ between absorption costing and variable costing?

Absorption costing treats it as a product cost, while variable costing treats it as a period expense. Signup and view all the answers

What is a key distinction between full costing and variable costing?

Full costing includes both variable and fixed manufacturing costs. Signup and view all the answers

What factor should be treated carefully when making a make or buy decision?

Fixed costs Signup and view all the answers

Which of the following is the main characteristic of outsourcing decisions?

Long-term commitments Signup and view all the answers

What aspect is essential to consider regarding suppliers when making outsourcing decisions?

Supplier's financial stability Signup and view all the answers

What should be considered when adding or deleting a product or service?

Changes in costs and benefits Signup and view all the answers

What should be considered when deciding to accept a special order if there is no spare capacity?

The opportunity cost of using the firm's facilities Signup and view all the answers

If a special order generates more incremental revenue than the incremental costs associated with it, what is the recommended course of action?

The order should be accepted Signup and view all the answers

Which financial metric is calculated when determining the segment margin from a product line?

Contribution margin minus avoidable fixed costs Signup and view all the answers

In the context of a special order, what does the term 'incremental costs' refer to?

Additional costs incurred for producing the special order Signup and view all the answers

What does outsourcing typically involve?

Contracting part of a manufacturing process to an outside business Signup and view all the answers

What should managers be cautious about when evaluating traditional accounting data for decision-making?

Reliability of historical cost allocations Signup and view all the answers

What is the per unit margin achieved from accepting a special order priced at $17 per unit with a cost of goods sold of $13 per unit?

$4 per unit Signup and view all the answers

In the decision to delete a product line, which cost is directly relevant?

Variable and avoidable fixed costs associated with the product Signup and view all the answers

What type of costs must be evaluated when deciding whether to make or buy a product?

Avoidable costs and opportunity costs Signup and view all the answers

Which component of cost must be factored in when production capacity is fully utilized?

Opportunity costs Signup and view all the answers

What is typically included in the cost of goods sold that affects the decision concerning special orders?

Fixed manufacturing costs Signup and view all the answers

In the decision-making process for a special order, what financial outcome is desired?

To maximize incremental income Signup and view all the answers

What are joint products?

Two or more products produced simultaneously from one production process Signup and view all the answers

What is the split-off point in production?

The point in the production process where products can be differentiated Signup and view all the answers

How are joint costs allocated among joint products?

In proportion to their sales value at the split-off point Signup and view all the answers

In the process of producing cocoa products, which of the following is TRUE?

Cocoa butter and cocoa powder are joint products Signup and view all the answers

What best defines joint costs?

Manufacturing costs incurred during the joint production process Signup and view all the answers

Which one of the following best exemplifies a relative sales value method of joint cost allocation?

Allocating costs in proportion to the sales value at the split-off point Signup and view all the answers

What happens to the cocoa powder after its initial production?

It can be sold directly or processed further into instant cocoa mix Signup and view all the answers

Why is the relative sales value method important in production decisions?

It allocates costs in relation to the revenue potential of each product Signup and view all the answers

Which factor is most important for Martin, Inc. when determining production focus given its limited resources?

Maximizing the contribution margin Signup and view all the answers

What does the term 'bottleneck' refer to in the context of production?

A resource that is operating at maximum capacity Signup and view all the answers

If Martin, Inc. has a lathe capacity of 2,400 minutes per week, how should it allocate time effectively?

To the product with higher contribution margin per minute Signup and view all the answers

What is a common outcome of working at maximum capacity at a bottleneck resource?

Potential lost sales opportunities Signup and view all the answers

When operational resources are limited, which factor is generally irrelevant in the decision-making process?

Fixed costs Signup and view all the answers

In a situation where machines have excess capacity, which resource takes precedence for production decisions?

Limited machine time Signup and view all the answers

Why is it advantageous for Martin, Inc. to analyze contribution margins?

It assists in prioritizing production decisions Signup and view all the answers

What does maximizing the contribution margin imply for a company facing limited resources?

Selecting products that yield the highest revenue per unit of limited resource Signup and view all the answers

What is the net effect on operating income of adding a new feature to the Desk Company's product?

A $3,500 decrease in operating income Signup and view all the answers

How much additional revenue does Desk Company expect to generate from the new feature per unit sold?

$15 per unit Signup and view all the answers

What are the total incremental costs associated with adding the new feature?

$32,000 Signup and view all the answers

What factor could be affected by adding a new feature to a product, as mentioned in the context?

Customer satisfaction Signup and view all the answers

What is the expected number of units Desk Company plans to sell with the new feature?

1,900 units Signup and view all the answers

What is the calculation used to determine the change in operating income after adding the feature?

Revenue from feature minus total costs Signup and view all the answers

Which statement accurately describes the overall impact of the new feature on Desk Company's financials?

It results in a minor reduction in profits next year. Signup and view all the answers

What is a potential strategic issue to consider when adding a new feature to a product?

The effect on staff morale and employee retention Signup and view all the answers

Study Notes

Key Responsibilities of Managers

Define organizational goals to provide direction.
Establish objectives necessary to achieve defined goals.
Identify and assign specific tasks critical for goal fulfillment.
Ensure coordination among various organizational activities to enhance efficiency.

Management Control Environment

Influenced by rules, guidelines, and procedures.
Organizational culture shaped by:
- Tradition, which establishes norms and practices.
- Internal influences such as company values and employee behaviors.
- External influences including market conditions and regulatory frameworks.
- Attitudes of senior management and the Board of Directors (BOD) play a significant role in shaping culture.

Influence of Senior Management

The attitudes of senior management directly impact the overall organizational environment and employee behavior, creating a trickle-down effect.

Key to Control

The essential process of determining organizational programs and allocating corresponding resources for effective management.

Budget Creation Information

Data required includes historical spending, revenue projections, and resource allocation needs to inform financial planning.

Basic Functions of Performance Evaluation

Provide constructive feedback to individuals regarding their performance.
Serve as a foundation for behavior modification and the improvement of working habits.
Supply managerial data for future job assignments, promotions, and compensation decisions.

Decentralisation vs. Centralisation

Centralised organisations make decisions that are handed down from top management to lower levels of staff.
In decentralised organisations, decision-making is delegated to divisional and departmental levels, allowing subordinates to carry out their responsibilities.

Decision Making Delegation

Decision-making authority is pushed down from top management to encourage quicker responses at lower levels of the organization.

Controllable and Noncontrollable Fixed Costs

Controllable Fixed Costs: Can be influenced by profit center managers within a year, includes expenses like advertising and data processing.
Noncontrollable Fixed Costs: Cannot be influenced within a year's time, includes costs such as depreciation and taxes.

Variable Costing vs. Full Costing

Variable Costing: Uses a contribution income statement that separates variable and fixed costs.
Full Costing (or Absorption Costing): Includes fixed manufacturing costs as part of product cost and is required for financial reporting and tax purposes.
Full costing adheres to the matching principle, while variable costing supports management control objectives.

Absorption Costing

Accounts for both fixed and variable production costs as product costs.

Variable Costing

Assigns only the variable costs of production to products.

Reconciling Income Under Absorption and Variable Costing

Fixed manufacturing overhead is assessed at 150,000,translatingto150,000, translating to 150,000,translatingto6.00 per unit for 25,000 units produced.

Evaluation of Variable Costing

Variable costing is straightforward and aligns with Cost-Volume-Profit (CVP) analysis.
It emphasizes the contribution margin for short-term pricing decisions and shows the impact of fixed costs on profitability.

Evaluation of Absorption Costing

Treats fixed manufacturing overhead as a product cost along with direct materials and labor.
Suitability for long-run pricing decisions and complies with external reporting requirements and tax law standards.

Upcoming Topic

Next week will cover Relevant Costing principles.

Learning Objectives

Understand the decision-making process and the management accountant's role.
Identify and evaluate relevant information for decision-making, including sunk and opportunity costs.
Prepare income statements under absorption and variable costing.
Analyze manufacturing decisions involving joint products and limited resources.
Acknowledge the impact of information overload on decision efficacy.

Unique vs. Repetitive Decisions

Unique Decisions: Infrequent occurrences requiring both internal and external relevant information.
Repetitive Decisions: Regular or irregular intervals using readily available historical data.

Relevant Costs and Benefits

Sunk Costs: Costs already incurred that cannot be recovered.
Opportunity Costs: Benefits lost when choosing one alternative over another.
Out-of-Pocket Costs: Cash expenses that will occur.
Incremental Revenue: Additional income expected from a decision.
Avoidable Costs: Costs that can be eliminated if a decision is made.
Unavoidable Costs: Costs that cannot be eliminated regardless of the decision taken.

Special Order Decisions

Decisions regarding one-off customer orders.
Use of idle capacity allows for meeting special order without affecting regular production.
Relevant costs focus on incremental costs. Fixed costs are often excluded from the analysis.
If incremental revenues exceed costs, the order should be accepted.

Special Order Example

Andre, Incorporated has excess capacity and a special order for 4,200 units at $17 each.
Cost of Goods Sold per unit calculated at 13,yieldinga13, yielding a 13,yieldinga4 margin per unit.
Total margin of $16,800 from the special order suggests acceptance.

Make or Buy Decisions

Organizations decide whether to produce a product or purchase from an external supplier.
Analysis includes evaluating avoidable and unavoidable costs, with opportunity costs considered.

Joint Products

An example involves cocoa processing where cocoa butter is sold as a joint product.
Further processing costs may be incurred, impacting the decision to produce additional products.
If additional revenue from further processing surpasses costs, it is beneficial to proceed.

Decisions Involving Limited Resources

Organizations often face constraints such as limited raw materials, labor, or machinery.
Fixed costs typically persist regardless of production choices; maximizing contribution margin is vital.
Bottlenecks may occur in production, requiring strategic focus on using limited resources effectively.

Example of Limited Resources

Martin, Inc. faces a situation with a lathe as a bottleneck, operating at maximum capacity.
Decisions must prioritize production of Webs or Highs to optimize resource utilization.

Manufacturing Costs

Direct Materials: Raw materials used in production, easily traceable to the finished product.
Direct Labor: Salaries, wages, and benefits for personnel directly involved in manufacturing.
Manufacturing Overheads: Indirect costs including materials (e.g., lubricants), labor (e.g., maintenance staff), depreciation, and taxes.
Product Cost: Total cost assigned to a product calculated as Direct Materials + Direct Labor + Manufacturing Overhead.

Cost Terminology

Direct Costs: Easily traced to a product or department.
Indirect Costs: Costs allocated to products or departments rather than easily traced.
Opportunity Cost: Potential benefit lost when choosing one alternative over another.
Sunk Cost: Past costs that cannot be altered by any current or future decisions.
Controllable Cost: Costs that a manager can significantly influence.

Cost Behavior

Represents how costs react to changes in business activity levels.

Contribution Margin

Calculated as Total Revenues minus Total Variable Costs.

Introduction to Management Control Systems

Refers to processes by which managers guide organization members to implement strategies efficiently and effectively, based on existing goals.

Goal Congruence

Aligns individual participant goals with organizational objectives to promote a unified direction.

Management Control Environment

Comprises four main facets:
- Nature of Organizations: Defines cooperative group dynamics.
- Rules and Procedures: Established guidelines governing member actions.
- Organizational Culture: The collective values and norms within the organization.
- External Environment: Influences from outside the organization impacting control systems.

Phases of Management Control

Strategic Planning: Establishing goals and directions.
Budgeting: Allocating resources based on strategic objectives.
Evaluation: Assessing outcomes against strategies and budgets.
Measurement and Reporting: Collecting and analyzing data for informed decision-making.
Adjustments: Modifying operations based on feedback and evaluation results.

Decentralization

Decentralization involves decision-making spread across different levels of management rather than concentrated at the top.
Higher echelons in a centralized organization make decisions that subordinates carry out.
Decentralization is typically seen as organizations expand, empowering lower-level management to make decisions.

Decision-Making Delegation

Top management pushes decision-making down to middle management and supervisors.
This delegation allows for quicker responses to opportunities and problems.

Benefits of Decentralized Organizations

Delegating responsibilities provides time relief for managers.
Empowers employees by leveraging their knowledge and expertise.
Timely decision-making enhances responsiveness to market changes.
Autonomy in decision-making promotes managerial training and professional growth.
Increased decision-making authority boosts employee motivation.

Costs of Decentralized Organizations

May result in a lack of a cohesive big-picture view among departments.
Potential for poor coordination due to isolated decision-making.
Narrow focus may hinder overall organizational effectiveness.
Challenges in transferring knowledge between different management levels.

Contribution Income Statement

A method for evaluating profit centers' performance by examining the contribution margin.
Details vary based on the management's needs, focusing on costs controllable by individual profit centers.
Measures all traceable costs and excludes non-controllable costs.

Role of Contribution Income Statement in Performance Evaluation

Distinguishes between controllable and non-controllable costs.
Avoids potential distortions associated with the "inventory effect" of full costing.

Absorption Costing

An accounting method that includes both fixed and variable production costs as product costs.
Allocates all costs associated with the production of goods to the units produced.

Variable Costing

A cost accounting system that assigns only variable production costs to products.
Fixed costs are treated separately as period expenses.

Unit Cost Determination

Unit product costs are calculated while treating selling and administrative expenses as period expenses, deducted from total revenue.

Absorption Costing Income Statements (Mellon Co. Example)

Mellon Co. produced 25,000 units with no beginning inventory.
Sold 20,000 units at a selling price of $30 each.
Absorption costing helps determine profitability by including all production costs in the cost of goods sold.

Relevant Costs for Special Orders

Incremental costs are significant when assessing special orders, especially with spare capacity.
Accept special orders if incremental revenues exceed incremental costs.
In cases without spare capacity, consider opportunity costs as well.

Special Order Example

Andre, Incorporated received a special order for 4,200 units at $17 per unit.
Current production anticipated at 12,000 units, with a sales price of $240,000 and a COGS of $186,000, leading to a gross margin of $54,000.
COGS per unit calculated to be $13.00 ([COGS $186,000 - Fixed Costs $30,000] ÷ 12,000 units).
Margin from the special order is $4.00 per unit, totaling an increase in income of $16,800.

Make or Buy Decisions

Organizations must evaluate whether to produce internally or purchase from suppliers, focusing on avoidable costs.
Opportunity costs often play a crucial role in decision-making.

Make or Buy Considerations

Careful treatment of fixed costs is essential.
Strategic considerations include quality, delivery, and supplier reliability.

Outsourcing Decisions

Involve contracting parts of manufacturing or other functions to external businesses.
Typically represent long-term commitments and are challenging to reverse.

Adding or Deleting Products

Examine changes in costs and benefits before making production decisions.
Decisions can have long-term consequences; traditional accounting must be interpreted cautiously.

Add or Delete Example

Desk Company selling a product for $40 considers adding a feature for $55, which will cost $32,000 to implement.
Expected 1,900 units could reduce operating income by $3,500 (incremental revenue of $28,500 minus $32,000 cost).

Joint Products: Sell or Process Further

Joint products are multiple outputs from a single manufacturing process.
At the split-off point, products become identifiable separately, and joint costs are allocated based on relative sales value.

Joint Products Example

Cocoa beans yield cocoa butter and cocoa powder, which can be sold directly or further processed into instant cocoa mix.

Decisions Involving Limited Resources

Organizations often face constraints on resources such as floor space or manufacturing time.
The goal is to maximize contribution margins while recognizing ongoing fixed costs.

Limited Resources Example

Martin, Inc. has a lathe working at 100% capacity, serving as a bottleneck.
Determine strategic focus between two products (Webs or Highs) based on lathe capacity and contribution margin analysis.

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Test your understanding of key management responsibilities. This quiz covers essential tasks like goal setting, objective determination, and activity coordination vital for effective management. Assess your knowledge and gain insights into management functions.

Management Responsibilities Quiz

Questions and Answers

The key responsibilities of managers include: (1) Deciding what the goals should be (2) Deciding on the objectives that should be achieved to move towards the goal (3) Tasks that need to be performed to achieve the goal (4) Coordination of organizational activities

An organization’s control system is affected by the following facets of management control environment EXCEPT:

Rules, guidelines and procedures:

Organisational cultures are guided by: (1) Tradition (2) Internal Influences (3) External Influences (4) Attitudes of senior management and the Board of Directors (BOD)

The attitude of senior management will be reflected in the attitude of:

The key to control is:

_____________ Is the process of deciding on the programs the organisation will undertake and the approximate amount of resources to be allocated to each programme.

Control includes:

What information is needed to create a budget?

A number of elements contribute to the quality of an organisation’s control environment. These may be used as indicators of the quality of an organisation’s internal control environment. Which one of the following is not one of these elements?

______ refers to a cost that can be identified with, or traced to, a particular cost object in an economic manner.

_____ refers to a cost that cannot be identified with, or traced to, a cost object in an economic manner.

_____ refers to an item assigned a separate measure of cost.

_______ refers to the potential benefit that is given up when one alternative is selected over another.

______ refers to all costs incurred in the past that cannot be changed by any decision made now or in the future.

If a manager can control or significantly influence the level of a cost, then that cost is classified as a ________

_____ refers to a cost that changes, in total, in direct proportion to a change in the level of activity.

____ refers to a cost that remains unchanged in total despite changes in the level of activity.

The discipline that studies the behaviour of people in organisations is called _______.

The cost of feeding 500 children in a public school cafeteria is $800 per day, or $1.60 per child per day. What economic term describes this $1.60

What economic term would be used to describe the cost of including one extra child in a day-care centre.

What economic term would be used to describe the cost of merchandise inventory purchased two years ago, which is now obsolete.

The cost of building an automated assembly line in a factory is $800,000. The cost of building a manually operated assembly line is $375,000. What economic term is used to describe the difference between these two amounts?

The cost of building an automated assembly line in a factory is $800,000. The cost of building a manually operated assembly line is $375,000. What economic term is used to describe the $800,000 cost of building the automated assembly line?

What economic term would be used to describe the cost incurred by a mass customizer such as Dell Computer to produce one more unit in its most popular line of laptop computers.

____ refers to the increase in production costs generated by the production of additional product units.

_______ Is the process of deciding on the programs the organisation will undertake and the approximate amount of resources to be allocated to each programme.

_____ is a planning process expressed in quantitative, usually monetary, terms that covers a specified period of time, usually one year.

What is the correct order of the "Phases of management control"? (1) Budgeting (2) Evaluation (3) Measurement and reporting (4) Strategic Planning

What is the per unit fixed manufacturing overhead given fixed overhead of $150,000 and 25,000 units produced?

Which advantage of variable costing emphasizes its use in pricing decisions?

In what way does variable costing impact profit reporting compared to absorption costing?

What does management find beneficial about variable costing in relation to cost-volume-profit (CVP) analysis?

Which of the following is a disadvantage of variable costing?

Why might fixed manufacturing overhead be considered an important factor in profit evaluation?

Which of these statements best describes contribution margin analysis in relation to variable costing?

What aspect of profit does variable costing emphasize that differs from absorption costing?

What does absorption costing primarily include as product costs?

Which costing method assigns only variable costs to products?

How do fixed costs relate to absorption costing?

What is a key distinction between absorption costing and variable costing?

What type of costs does variable costing emphasize?

Why might a company choose to use variable costing?

Which component is NOT included in product costs under absorption costing?

In absorption costing, how are fixed costs treated during periods of lower production?

Which of the following costs can a profit center manager influence in approximately a year or less?

What distinguishes full costing from variable costing?

Which of the following is true about variable costing?

Which of the following statements about noncontrollable fixed costs is correct?

What is a key benefit of full costing when preparing financial statements?

Which management objective is best met by variable costing?

Which factor contributes to the use of full costing in product pricing?

Which aspect of full costing is particularly emphasized in financial reporting?

In a decentralized organization, where are decisions primarily made?

What does it mean for decisions to be pushed down in a decentralized decision-making structure?

Which characteristic best describes a centralized organization?

What is the primary disadvantage of a centralized decision-making approach?

How does decentralization benefit lower-level managers in an organization?

What aspect might hinder effective decentralization in an organization?

What is a key advantage of decentralization when it comes to decision-making?

Which of the following statements about decentralized organizations is typically true?

What impact does decentralization have on top management's involvement?

In terms of resource allocation, what is often a concern in decentralized organizations?

How is fixed manufacturing overhead treated under absorption costing?

What is a primary requirement for using absorption costing?

Which of the following statements is true regarding absorption costing?

Which of the following is a disadvantage of not using absorption costing?

What is the impact of external reporting requirements on costing methods?

What is the primary focus of relevant costing in decision-making?

Which cost category refers to the potential benefit that is foregone when choosing one alternative over another?

What distinguishes variable costing from absorption costing?

In the context of manufacturing decisions, which aspect is essential when dealing with joint products and limited resources?

Which statement best defines the role of management accountants in the decision-making process?

What is the primary focus of relevant costs in the context of special order decisions?

What characterizes unique decisions compared to repetitive decisions?

Which of the following costs is considered irrelevant when making special order decisions?

What type of costs are typically considered when evaluating the feasibility of accepting a special order?

In decision making, which term refers to the benefit foregone when an alternative option is chosen?

The key responsibilities of managers include:

(1) Deciding what the goals should be

(2) Deciding on the objectives that should be achieved to move towards the goal

(3) Tasks that need to be performed to achieve the goal

(4) Coordination of organizational activities

Organisational cultures are guided by:

(1) Tradition

(2) Internal Influences

(3) External Influences

(4) Attitudes of senior management and the Board of Directors (BOD)

A number of elements contribute to the quality of an organisation’s control environment. These may be used as indicators of the quality of an organisation’s internal control environment.

Which one of the following is not one of these elements?

What is the correct order of the "Phases of management control"?

(1) Budgeting

(2) Evaluation

(3) Measurement and reporting

(4) Strategic Planning