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study help
business
cost accounting

Questions and Answers of Cost Accounting

What is the contribution margin? LO7
Give the formulas commonly used by firms manufacturing a single product to determine the break-even point (a) in dollars of sales rev¬ enue and (b) in units of product. LO7
Identify the numbered components in the fol¬ lowing break-even chart: LO7 6 454 8 4
Discuss the significance that the concept of the relevant range has to break-even analysis. LO7
Discuss weaknesses inherent in the preparation and uses of break-even analysis. LO7
How does the break-even point move when changes occur in (a) variable cost? (b) fixed cost? LO7
What is the margin of safety? LO7
What is meant by the term cost-volume-profit relationship? Why is this relationship important in business management? LO7
Define the term differential cost study and relate it to short-term decision making. LO3
Distinguish costs that are relevant to short-term decision making from those that are not. LO3
List several examples of short-term decision problems for which differential cost can be computed. LO3
Compute differential cost and use it to make short-run economic decisions. LO3
(Appendix) Define linear programming and list its uses. LO3
(Appendix) Formulate a linear programming problem and solve it using the graphic method. LO3
Give a broad definition of the term differential cost. What other terms are often used and by whom? LO3
Distinguish between marginal cost and mar¬ ginal (or direct) costing. LO3
Differential costs are also called incremental costs. Why is the identification of incremental costs important in decision making? LO3
Differential costs do not correspond to any pos¬ sible accounting category. Explain. LO3
In what way is a flexible budget useful in the preparation of differential cost analyses? LO3
Why are historical costs usually irrelevant for decision making? LO3
Why is variable cost so important in differential cost studies? LO3
Explain how a fixed cost can be relevant in a decision between alternative choices. LO3
Define opportunity costs. LO3
(Appendix) Examine the graph in Figure 21-1 and answer the following questions: LO3(a) The area bounded by the lines AB, BC, CD, and AD is called the feasible area. Why?(b) The triangles BCF and CDE
(Appendix) What is the simplex method? LO3
(Appendix) What is linear programming? LO3
What are sunk costs? LO3
State the need for a structured framework for planning capital expenditures. LO3
Cite examples of ethical problems in capital budgeting. LO3
List different motivations and objectives for capital expenditures. LO3
Classify capital expenditures. LO3
Identify the amount and timing of cash flows. LO3
Adjust cash flows to reflect anticipated inflation. LO3
Adjust cash flows for the expected effect of income taxes. LO3
Enumerate the steps in controlling capital expenditures. LO3
Why are effective planning and control of capi¬ tal expenditures important? LO3
The capital budgeting process provides both an opportunity and a temptation for unethical behavior. Give three examples. LO3
What should the cost/managerial accountant do if faced with the ethical problems noted in question Q22-2? LO3
Differentiate between the economic and physi¬ cal life of a project. LO3
List some cash outflows that might be expected for a capital expenditure. LO3
List some sources of cash inflows that might be expected from a capital expenditure. LO3
What are some nonquantifiable benefits of investing in such advanced manufacturing tech¬ nologies as CIM, FMS, and robotics? LO3
Is depreciation deducted for tax purposes likely to differ from book (or financial accounting) depreciation? Explain. LO3
Should book depreciation be considered in the estimation of future cash flows of a proposed project? Explain. LO3
Should tax depreciation be considered in the estimation of future cash flows of a proposed project? Explain. LO3
Financial accounting data are not entirely suit¬ able for use in evaluating capital expenditures. Explain. LO3
Discuss benefits to be derived from a follow-up of project results. LO3
Define the cost of capital and compute it. LO9
Compute the accounting rate of return for a capital expenditure proposal. LO9
Explain the concept of the time value of money. LO9
Compute the net present value for a capital expenditure proposal. LO9
Compute the internal rate of return for a capital expenditure proposal. LO9
Describe the procedure for computing the weighted-average cost of capital. LO9
Why would a firm use its weighted-average cost of capital as the hurdle rate (minimum rate) for a project investment decision, rather than the specific marginal cost of funds? LO9
Discuss the practical difficulties in estimating the firm’s weighted-average cost of capital CGA-Canada (adapted). Reprint with permission. LO9
Define the payback (or payout) period method. LO9
How do the two accounting rate of return meth¬ ods differ? LO9
What is the present value concept and why is it important in capital budgeting? LO9
What is the basic difference between the pay¬ back method and the net present value method? LO9
What is the difference between the net present value and the internal rate of return calculations? LO9
Some companies inflate the discount rate used in the net present value method in order to compensate for risk associated with the capital expenditure project. This approach is unsound. Explain why
Compute the payback period for a capital expenditure proposal. LO9
Define probability and conditional value. LO1
Compute the expected value of an event given a probability distribution. LO1
Compute the variance and the standard deviation of the expected value. LO1
Define and compute the coefficient of variation. LO1
Prepare a payoff table and determine the best strategy under conditions of uncertainty. LO1
Compute the expected value of perfect information. LO1
Revise probabilities on the basis of new information and construct a revised payoff table. LO1
Construct and use decision trees to determine the best alternative course of action. LO1
Compute the expected net present value and the standard deviation of the net present value for capital expenditure proposals. LO1
Use multiattribute decision models that specifically consider both quantitative and nonquantitative factors in the decision. LO1
Why should a manager try to assess the proba¬ bilities associated with possible outcomes before making a decision under conditions of uncertainty? LO1
In what way is the standard deviation of the expected value useful? LO1
What is the coefficient of variation, and how is it used in evaluating alternatives? LO1
Contrast joint probability and conditional probability. LO1
Why would management be interested in the revision of probabilities? LO1
What is a decision tree and how is it used? LO1
What is the difference between a discrete prob¬ ability distribution and a continuous probability distribution? LO1
What are the attractive properties of the normal distribution? LO1
What is the purpose of Monte Carlo simulation? LO1
Even if cash flows are normally distributed, it is desirable to incorporate probability analysis into capital expenditure evaluation. Why? LO1
In what way does the computation of the vari¬ ance of multiperiod cash flows differ from the variance of a single period cash flow? LO1
In a capital budgeting context, what is meant by independent periodic cash flows and under what conditions might they be expected to occur? LO1
In a capital budgeting context, what is meant by perfectly correlated periodic cash flows and under what conditions might they be expected to occur? LO1
How might the variance of the net present value of a capital expenditure proposal be com¬ puted if the periodic cash flows are neither independent nor perfectly correlated? LO1
What is MADM, and in what way is it useful? LO1
Compare marketing expenses with manufacturing costs. LO2
List marketing functions and expense classifications. LO2
Provide examples of the application of manufacturing cost control techniques to the control of marketing expenses. LO2
Analyze profitability by territories, customers, products, and salespersons. LO2
Define life-cycle costing and relate it to cost reduction and product pricing. LO2
List six different product pricing approaches. LO2
What general principles should be observed when a system of control for marketing expenses is being planned? LO2
How should marketing expenses be classified so that control and analysis are facilitated? LO2
What is activity-based management? LO2
What are the objectives of profit analysis by sales territories? LO2
What is activity-based costing, and how does it provide useful information for product prof¬ itability analyses? LO2
How does the contribution margin approach improve product-line profitability analysis? LO2
What causes changes in the gross profit or con¬ tribution margin? LO2

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