Costt 12

Cost Accounting, 15e (Horngren/Datar/Rajan) Chapter 12 Strategy, Balanced Scorecard, and Strategic Profitability Analysis Objective 12.1 1) Which of the following statements best define strategy? A) It describes how an organization can create value for its customers while differentiating itself from its competitors. B) It is an organization's ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. C) It is an organization's ability to offer products or services its customers perceive to be superior and unique relative to the products or services of its competitors. D) It describes how an organization motivates its employees to work for more hours without any increase in their wages. Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking

2) In general, profit potential of an organization decreases with ________. A) lesser competition and stronger potential entrants B) greater competition and stronger potential entrants C) lesser competition and weaker potential entrants D) greater competition and weaker potential entrants Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking

3) Which of the following statements best define a product differentiation strategy? A) It describes how an organization can increase customer base by differentiating its' product prices from its competitors. B) It is an organization's ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. C) It describes how an organization can decrease product prices by differentiating its' raw materials from its competitors. D) It is an organization's ability to offer products or services its customers perceive to be superior and unique relative to the products or services of its competitors. Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking

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4) While doing industry analysis on five forces, which of the following is a force that shapes an organization's profit potential? A) previous year profit figures B) current year profit figures C) bargaining power of suppliers D) research and development Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking

5) ________ is an organization's ability to offer products or services that are perceived by its customers as being superior and unique relative to those of its competitors. A) Strategy B) Product differentiation C) Cost leadership D) The balanced scorecard Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking

6) ________ refers to an organization's ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. A) Marketing strategy B) Product differentiation C) Cost leadership D) Competitor differentiation Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking

7) An organization that is using the product differentiation approach would ________. A) focus on tight cost control B) use innovative research and development C) provide products that are similar to competitors D) offer products at a lower cost than competitors Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking

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8) An organization that is using the cost leadership approach would ________. A) incur costs for innovative R&D B) provide products at a higher cost than competitors C) focus on productivity through efficiency improvements D) bring products to market rapidly Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking

9) Stewart Corporation plans to grow by offering a sound system, the SS3000, that is superior and unique from the competition. Stewart believes that putting additional resources into R&D and staying ahead of the competition with technological innovations is critical to implementing its strategy. Stewart's strategy is ________. A) product differentiation B) downsizing C) product leadership D) cost leadership Answer: A Diff: 2 Objective: 1 AACSB: Application of knowledge

10) Terbium Corporation manufactures water toys. It plans to grow by producing high-quality water toys that are delivered in a timely manner. There are a number of other manufacturers who produce similar water toys. Terbium believes that continuously improving its manufacturing processes and reengineering processes to downsize and eliminate excess capacity are critical to implementing its strategy. Out of the two basic strategies, Terbium's strategy is ________. A) product differentiation B) product leadership C) cost differentiation D) cost leadership Answer: D Diff: 2 Objective: 1 AACSB: Application of knowledge

11) Strategy describes how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking

12) One of the five forces of industry analysis is understand the bargaining power of customers. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking

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13) Higher selling prices, rather than unique products or services, provide a competitive advantage for the cost leader companies. Answer: FALSE Explanation: Lower selling prices, rather than unique products or services, provide a competitive advantage for the cost leader companies. Diff: 1 Objective: 1 AACSB: Analytical thinking

14) An organization which uses product differentiation strategy will charge higher prices. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking

15) The cost leadership strategy is for products and services that are similar to competitor's products and services. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking

16) The cost leadership strategy is best for a company if the engineering staff is more skilled at creatively designing new products than at making process improvements. Answer: FALSE Explanation: The cost leadership strategy is best for a company if the engineering staff is more skilled at making process improvements than at creatively designing new products. Diff: 2 Objective: 1 AACSB: Analytical thinking

17) Cost-leadership strategy always advocates cuts in personnel to achieve cost reduction. Answer: FALSE Explanation: Even though cost-leadership strategy emphasizes cost reduction, cuts in personnel that would hurt employee morale and hinder future growth are not desirable. Diff: 2 Objective: 1 AACSB: Analytical thinking

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18) Bosely Corporation is reviewing its business strategy. The first step for Bosely is to perform an industry analysis. You have been hired to help the company go through the strategy formulation process. Required: To perform the industry analysis, what areas should Bosely focus on and give at least one example of how Bosely can effectively deal with each area. Answer: The industry analysis is composed of five areas: 1. Competitors - How competitive is the industry for Bosely's particular product ? They can differentiate the product to reduce competition. 2. Potential entrants to the market - How easy is it for new competitors to join the market? Create barriers to entry, such as high capital requirements. 3. Equivalent products - Is there a substitute product available? Make continuous product improvements to reduce likelihood of equivalent products. 4. Bargaining power of customers - How many suppliers can customers access? Try to negotiate longterm purchase agreements. 5. Bargaining power of input suppliers - How many raw material vendors are there? Try to find alternative suppliers and negotiate the best price for raw materials. Diff: 2 Objective: 1 AACSB: Analytical thinking

19) Explain the term cost leadership. What are the possible ways through which a company would try to become a cost leader? How far is it desirable to implement cost reduction measures? Answer: Cost leadership is an organization's ability to achieve lower costs relative to its competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. These companies provide products and services that are similar to—not differentiated from—their competitors, but at a lower cost to the customer. Lower selling prices, rather than unique products or services, provide a competitive advantage for these cost leaders. To achieve its cost-leadership strategy, companies would try to improve its own internal capabilities. It must enhance quality and also reengineer processes to downsize and eliminate excess capacity to reduce costs. At the same time, it is not desirable to implement cost reduction measures such as compromise in product quality, cuts in personnel etc, as these kind of measures would hurt company morale and hinder future growth. Diff: 3 Objective: 1 AACSB: Analytical thinking

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Objective 12.2 1) ________ is the fundamental rethinking and redesign of business processes to achieve improvements in critical measures of performance such as cost, quality, service, speed, and customer satisfaction. A) Strategy B) Product differentiation C) Product designing D) Reengineering Answer: D Diff: 1 Objective: 2 AACSB: Analytical thinking

2) Which of the following is an example of process reengineering measure? A) charging higher prices to increase tax benefit B) decreasing quantity of output produced to increase total factor productivity C) increasing costs of all inputs used to increase total factor productivity D) employing more skilled workers to improve quality Answer: D Diff: 2 Objective: 2 AACSB: Application of knowledge

3) The fundamental rethinking and redesign of business processes to achieve improvements in critical measures of performance, such as cost, quality, service, speed, and customer satisfaction is ________. A) directing B) controlling C) reengineering D) structuring Answer: C Diff: 1 Objective: 2 AACSB: Analytical thinking

4) Companies which strive to achieve cost leadership should never try to implement business process reengineering measures. Answer: FALSE Explanation: Companies which strive to achieve cost leadership can always look at business process reengineering measures to reduce process costs. Diff: 2 Objective: 2 AACSB: Analytical thinking

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5) Reengineering benefits are most significant when they focus on one business function rather than crossing functional lines of the business process. Answer: FALSE Explanation: Reengineering benefits are most significant when they cut across functional lines to focus on the entire business process. Diff: 2 Objective: 2 AACSB: Analytical thinking

6) Successful reengineering efforts generally involve changing the roles and responsibilities of employees. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking

7) What is reengineering. Can you contrast a reengineering approach to change with a kaizen approach to change? Answer: Reengineering is the rethinking of business processes, such as the order delivery process, to improve critical performance measures such as cost, quality, or customer satisfaction. It can be contrasted to a kaizen approach to change in that reengineering is most often a sudden, drastic change, while a kaizen approach involves small, incremental but continual improvements. Diff: 2 Objective: 2 AACSB: Analytical thinking

Objective 12.3 1) ________ translates an organization's mission and strategy into a comprehensive set of performance measures that provide the framework for implementing its strategy. A) Performance scoreboard B) Product differentiation C) Differential report D) Balanced scorecard Answer: D Diff: 1 Objective: 3 AACSB: Analytical thinking

2) A ________ is a diagram that describes how an organization creates value by connecting strategic objectives in explicit cause-and-effect relationships with each other in the balanced scorecard perspectives. A) value diagram B) balanced scoreboard C) strategic scorecard D) strategy map Answer: D Diff: 1 Objective: 3 AACSB: Analytical thinking

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3) The first step to successful balanced scorecard implementation is clarifying the ________. A) organization's vision and strategy B) elements that pertain to value-added aspects of the business C) owner's expectations about return on investment D) objectives of all four balanced scorecard measurement perspectives Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking

4) In an effective balanced scorecard, ________. A) net income serves as the best indicator for the hard-to measure long-run nonfinancial performance B) sales budget serves as one of the leading indicator for the hard-to measure short-run financial performance C) sales budget serves as a leading indicator for the hard-to measure short-run nonfinancial performance D) customer satisfaction serves as one of the leading indicator for the hard-to measure long-run financial performance Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking

5) Which of the following statements is true of a balanced scorecard? A) The balanced scorecard reduces managers' emphasis on long-run financial performance. B) The balanced scorecard reduces managers' emphasis on short-run financial performance. C) The primary goal of using the balanced scorecard is to sustain short-run financial performance. D) The primary goal of using the balanced scorecard is to sustain short-run nonfinancial performance. Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking

6) Which of the following statements is true of the internal-business-process perspective of a balanced scorecard? A) Internal-business-process perspective is composed of three subprocesses: innovation process; learningand-growth process; and postsales-service process. B) Internal-business-process perspective evaluates the profitability of the strategy and the creation of shareholder value. C) Internal-business-process improvement targets are often determined after benchmarking against an organization's main competitors standards. D) Internal-business-process perspective is composed of three subprocesses: operations process; learningand-growth process; and postsales-service process. Answer: C Diff: 3 Objective: 3 AACSB: Analytical thinking

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7) Which of the following statements best relates to the balanced scorecard's financial perspective? A) How can we obtain greater profits for the current year? B) How can we increase shareholder value? C) How will we obtain continuous improvements? D) How can we secure greater customer satisfaction? Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking

8) Which of the following statements best relates to the balanced scorecard's internal business processes perspective? A) How do we lower costs? B) How do we motivate employees? C) How can we obtain greater profits? D) How processes will increase value to customers? Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking

9) Which of the following statements best relates to the balanced scorecard's learning and growth perspective? A) How will we empower our employees? B) How do we lower costs? C) What processes will increase value to customers? D) How can we obtain greater profits? Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking

10) ________ is a measure of the balanced scorecard's financial perspective. A) Service response time B) Number of new patents C) Operating income D) Defect rates Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking

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11) ________ is a measure of the balanced scorecard's internal process perspective. A) Service response time B) Customer satisfaction C) Gross profit percentage D) Cost reduction Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking

12) ________ is a measure of the balanced scorecard's customer perspective. A) Number of client complaints B) Defect rates C) Number of process improvements D) Revenue growth Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking

13) ________ perspective of the balanced scorecard focuses on a company's own operations that create value for customers that, in turn, help achieve financial objectives. A) Financial B) Customer C) Internal-business-process D) Learning-and-growth Answer: C Diff: 1 Objective: 3 AACSB: Analytical thinking

14) ________ is a measure of the balanced scorecard's internal-business-process perspective. A) Market share B) Manufacturing downtime C) Return on investment D) Number of customer complaints Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking

15) Which of the following statements is a benefit of measuring environmental and social performance? A) It limits the number of performance measures, identifying only the most critical ones. B) It helps to communicate the strategy to all members of the organization. C) It enhances the identification of cause-and-effect relationships to evaluate benefits. D) It uses financial measures to serve as leading indicators of future nonfinancial performance. Answer: C Diff: 2 Objective: 3

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AACSB: Analytical thinking

16) ________ is a measure of the balanced scorecard's learning-and-growth perspective. A) Information system availability B) Economic value added C) Cost reductions in key areas D) Customer-retention percentage Answer: A Diff: 2 Objective: 3 AACSB: Application of knowledge

17) Which of the following statements is true of successfully implementing a balanced scorecard? A) External auditors should design and implement the balanced scorecard. B) Balanced scorecard should never be communicated to all employees. C) Balanced scorecard should be formed exclusively by top management. D) Management accountants should determine the balanced scorecard measures. Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking

18) Which of the following statements is a possible pitfall while implementing a balanced scorecard? A) Managers using cost-benefit considerations while designing a balanced scorecard. B) Managers ignoring objective measures as market share, manufacturing yield. C) Managers using subjective measures in the balanced scorecard. D) Top management ignoring nonfinancial measures when evaluating employee performance. Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking

19) Eliminating excess capacity is an initiative to achieve the ________ perspective under a balanced scorecard. A) marketing B) customer C) learning and growth D) internal-business-process Answer: D Diff: 2 Objective: 3 AACSB: Application of knowledge

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20) The gross margin percentage is an example of the ________ measure of a balanced-scorecard. A) internal business process perspective B) customer perspective C) learning and growth perspective D) financial perspective Answer: D Diff: 2 Objective: 3 AACSB: Application of knowledge

21) The time taken to fulfill clients' requests is an example of the ________ measure of a balancedscorecard. A) internal business process perspective B) customer perspective C) learning and growth perspective D) financial perspective Answer: B Diff: 2 Objective: 3 AACSB: Application of knowledge

22) The operating capabilities is an example of the ________ measure of a balanced-scorecard. A) internal business process perspective B) customer perspective C) learning and growth perspective D) financial perspective Answer: A Diff: 2 Objective: 3 AACSB: Application of knowledge

23) The employee turnover rates is an example of the ________ measure of a balanced-scorecard. A) internal business process perspective B) customer perspective C) learning and growth perspective D) financial perspective Answer: C Diff: 2 Objective: 3 AACSB: Application of knowledge

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24) Stewart Corporation plans to grow by offering a sound system, the SS3000, that is superior and unique from the competition. Stewart believes that putting additional resources into R&D and staying ahead of the competition with technological innovations is critical to implementing its strategy. To further company strategy, measures on the balanced scorecard would most likely include ________. A) number of process improvements B) manufacturing quality C) yield D) an increase in operating income from productivity gains Answer: B Diff: 3 Objective: 3 AACSB: Application of knowledge

25) Terbium Corporation manufactures water toys. It plans to grow by producing high-quality water toys that are delivered in a timely manner. There are a number of other manufacturers who produce similar water toys. Terbium believes that continuously improving its manufacturing processes and reengineering processes to downsize and eliminate excess capacity are critical to implementing its strategy. To further company strategy, measures on the balanced scorecard would most likely include ________. A) number of process improvements B) price premium earned C) longer cycle times D) an increase in operating income from increased profit margins Answer: A Diff: 3 Objective: 3 AACSB: Application of knowledge

26) Which of the following statements is a disadvantage of balanced scorecards? A) Balanced scorecards ignore short-run objectives. B) Balanced scorecards may become unwieldy and difficult to understand. C) Balanced scorecards use a lot of nonfinancial measures. D) Balanced scorecards are of little use in influencing managerial behavior. Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking

27) The financial perspective of the balanced scorecard focuses on the profits and value created for shareholders. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking

28) The balanced scorecard uses financial and nonfinancial performance measures to evaluate short-run and long-run performance in a single report. Answer: TRUE Diff: 1 Objective: 3

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AACSB: Analytical thinking

29) The customer perspective of the balanced scorecard focuses on the success of the company in its target market. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking

30) To achieve success, it is important to set nonfinancial objectives as well as financial objectives. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking

31) An effective balanced scorecard helps to communicate the strategy to all members of the organization by translating the strategy into a coherent and linked set of understandable and measurable operational targets. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking

32) The customer perspective of the balanced scorecard evaluates the profitability of the strategy. Answer: FALSE Explanation: The financial perspective of the balanced scorecard evaluates the profitability of the strategy. Diff: 1 Objective: 3 AACSB: Analytical thinking

33) Time taken to replace or repair defective products is a measure of the financial perspective of the balanced scorecard. Answer: FALSE Explanation: Time taken to replace or repair defective products is a measure of the internal business perspective of the balanced scorecard. Diff: 2 Objective: 3 AACSB: Application of knowledge

34) The financial perspective of the balanced scorecard identifies targeted customers and market segments and measures the company's success in these segments. Answer: FALSE Explanation: The customer perspective of the balanced scorecard identifies targeted customers and market segments and measures the company's success in these segments. Diff: 2 Objective: 3 AACSB: Application of knowledge

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35) The customer perspective under the balanced scorecard approach would include measures on cost reduction. Answer: FALSE Explanation: The financial perspective under the balanced scorecard approach would include measures on cost reduction. Diff: 2 Objective: 3 AACSB: Application of knowledge

36) A good balanced scorecard tells the story of a company's strategy, articulating a sequence of causeand-effect relationships—the links among the various perspectives that align implementation of the strategy. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking

37) Buck Corporation plans to grow by offering a computer monitor, the CM3000 that is superior and unique from the competition. Buck believes that putting additional resources into R&D and staying ahead of the competition with technological innovations are critical to implementing its strategy. Required: a. Is Buck's strategy one of product differentiation or cost leadership? Explain briefly. Identify at least one key element that you would expect to see included in the balanced scorecard: b. for the financial perspective. c. for the customer perspective. d. for the internal business process perspective. e. for the learning and growth perspective. Answer: a. Buck's strategy is one of product differentiation because the company plans to offer a product that is superior and unique from the competition. The company's balanced scorecard should describe the product differentiation strategy. Key elements should include: b. operating income growth from charging higher margins for CM3000 for the financial perspective c. market share in the high-end monitor market, customer satisfaction, and new customers for the customer perspective d. manufacturing quality, new product features added, and order delivery time for the internal business perspective e. development time for new features, improvements in manufacturing technologies, employee education and skill levels, and employee satisfaction for the learning and growth perspective Diff: 3 Objective: 3 AACSB: Application of knowledge

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38) Maloney Corporation manufactures plastic water bottles. It plans to grow by producing high-quality water bottles at a low cost that are delivered in a timely manner. There are a number of other manufacturers who produce similar water bottles. Maloney believes that continuously improving its manufacturing processes and having satisfied employees are critical to implementing its strategy. Required: a.

Is Maloney's strategy one of product differentiation or cost leadership? Explain briefly.

Identify at least one key element that you would expect to see included in the balanced scorecard: b. for the financial perspective. c. for the customer perspective. d. for the internal business process perspective. e. for the learning and growth perspective. Answer: a. Maloney's strategy is one of cost leadership because there are a number of other manufacturers who produce similar water bottles. To succeed, Maloney will have to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost controls. The company's balanced scorecard should describe the product differentiation strategy. Key elements should include: b. operating income growth from productivity gains and growth for the financial perspective c. growth in market share, new customers, customer responsiveness, and customer satisfaction for the customer perspective d. yield, time to complete customer jobs, and order delivery time for the internal business perspective e. number of process improvements, hours of employee training, and employee satisfaction for the learning and growth perspective Diff: 3 Objective: 3 AACSB: Application of knowledge

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39) For each of the following measures, identify which perspective of the balanced scorecard it represents: financial, customer, internal-business-process, or learning-and growth. 1. service response time ( Internal) 2. market share (costumer) 3. gross margin percentage (Financial) 4. defect rates ( internal) 5. customer satisfaction (costumer) 6. information system availability (learning) 7. new-product development time 8. revenue growth (financial) 9. employee turnover rates (learning ) 10. setup time (internal) Answer: 1. internal-business-process 2. customer 3. financial 4. internal-business-process 5. customer 6. learning-and-growth 7. internal-business-process 8. financial 9. learning-and-growth 10. internal-business-process Diff: 3 Objective: 3 AACSB: Analytical thinking

40) Heliem Corp. uses the balanced scorecard technique to achieve its long term objectives. Managers of Heliem came to know that all the balanced scorecards objectives were achieved other than financial perspective measures for the previous period. While the learning and growth and internal business processes perspective measures were achieved with relative ease, Heliem had to strive extremely hard to achieve customer oriented measures. The company had failed miserably in achieving its financial measures. Using the given information, evaluate the strategy of Heliem and its implementation. Answer: Heliem failed miserably in achieving its financial measures. It also had to strive extremely hard to achieve customer oriented measures. This means that there were problems with the set strategies. It could be that the management had failed to identify the correct causal links between various perspectives or the measures set were too difficult to achieve. Heliem met its targets on the two perspectives that are more internally focused: learning and growth and internal business processes. This implies that it had no problems in strategy implementation. Heliem's managers can conclude that they did a good job in implementation, as the various internal nonfinancial measures it targeted improved, but that its strategy was faulty because there was no effect on customers or on long-run financial performance and value creation. Management should reevaluate the strategy and the factors that drive it. Diff: 2 Objective: 3 AACSB: Application of knowledge

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41) What are the four key perspectives in the balanced scorecard? Answer: The four key perspectives in the balanced scorecard are: a. Financial perspective - This perspective evaluates the profitability of the strategy and the creation of shareholder value. b. Customer perspective - This perspective identifies targeted customer and market segments and measures the company's success in these segments. c. Internal business processes perspective - This perspective focuses on internal operations that create value for customers that, in turn, help achieve financial performance. Managers determine internalbusiness-process improvement targets after benchmarking against the company's main competitors. d. Learning and growth perspective - This perspective identifies the people and information capabilities necessary for an organization to learn, improve, and grow. These capabilities help achieve superior internal processes that in turn create value for customers and shareholders. Diff: 2 Objective: 3 AACSB: Analytical thinking

Objective 12.4 1) Which component of strategy measures the changes in operating income attributed solely to an increase in the quantity of output between Year 1 and Year 2? A) the growth component B) the price-recovery component C) the productivity component D) the cost leadership component Answer: A Diff: 1 Objective: 4 AACSB: Analytical thinking

2) ________ are the subdivisions of income that management accountants use for the strategic analysis of operating income. A) Growth, price-recovery and cost leadership components B) Growth, price-recovery and productivity components C) Cost leadership, price-recovery and productivity components D) Growth, cost leadership and productivity components Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking

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3) Which component of strategy measures the reduction in costs attributable to a reduction in the quantity of inputs used in Year 2 relative to the quantity of inputs that would have been used in Year 1 to produce the Year 2 output? A) the growth component B) the price-recovery component C) the productivity component D) the cost leadership component Answer: C Diff: 1 Objective: 4 AACSB: Analytical thinking

4) When analyzing the change in operating income, the strategy component of growth ________. A) calculations are similar to the selling-price variance calculations B) isolates the change attributed solely to an increase in market share C) isolates the change attributed solely to an increase in industry growth D) isolates the change attributed solely to an increase in the quantity of units sold Answer: D Diff: 1 Objective: 4 AACSB: Analytical thinking

5) When analyzing the change in operating income, the strategy component of price-recovery ________. A) calculations are similar to the efficiency-variance calculations B) compares the change in output price with the changes in input prices C) will report a large positive amount when a company has successfully pursued the cost leadership strategy D) isolates the change attributed solely to an increase in production efficiencies Answer: B Diff: 1 Objective: 4 AACSB: Analytical thinking

6) When analyzing the change in operating income, the strategy component of productivity ________. A) calculations are similar to the sales-volume variance calculations B) compares the change in output price with the changes in input prices C) will report a large positive amount when a company has successfully pursued the cost leadership strategy D) isolates the change attributed solely to an increase in the quantity of units sold Answer: C Diff: 1 Objective: 4 AACSB: Analytical thinking

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7) Which of the following statements is true of strategic analysis of operating income? A) Management accountants compare budgeted operating performance over two different periods. B) Management accountants compare actual and budgeted operating performance over the same time periods. C) Management accountants compare actual operating performance of one year and budgeted operating performance of another year. D) Management accountants compare actual operating performance over two different periods. Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking

8) When analyzing the change in operating income, the strategy component of price-recovery will increase when ________. A) capacity is reduced B) market share is increased C) selling prices are increased D) more units are sold Answer: C Diff: 2 Objective: 4 AACSB: Application of knowledge

9) When analyzing the change in operating income, the strategy component of productivity will increase when ________. A) capacity is reduced B) quality is enhanced C) selling prices are increased D) more units are produced and sold Answer: A Diff: 2 Objective: 4 AACSB: Application of knowledge

10) Successful implementation of a cost leadership strategy will result in ________. A) large favorable growth and price-recovery components B) large favorable price-recovery and productivity components C) large favorable productivity and growth components D) only a large favorable growth component Answer: C Diff: 2 Objective: 4 AACSB: Application of knowledge

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11) Successful implementation of a product differentiation strategy will result in ________. A) a large favorable growth and price-recovery components B) a large favorable price-recovery and productivity components C) a large favorable productivity and growth components D) only a large favorable growth component Answer: A Diff: 2 Objective: 4 AACSB: Application of knowledge

12) Assuming previous year's production capacity was inadequate to produce current year output, the cost effect of growth for fixed costs is calculated by multiplying the difference between ________ by price per unit of capacity in the previous year. A) capacity units required to produce previous year output in current year and the current year capacity units B) capacity units required to produce current year output in previous year and the current year capacity units C) capacity units required to produce previous year output in current year and the previous year capacity units D) capacity units required to produce current year output in previous year and the previous year capacity units Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking

13) Assuming previous year's production capacity was adequate to produce current year output, the cost effect of growth for fixed costs is calculated by multiplying the difference between ________ by price per unit of capacity in the previous year. A) actual units of capacity in current year and actual units of capacity in previous year B) capacity units required to produce current year output in previous year and the current year capacity units C) actual units of capacity in previous year and actual units of capacity in previous year D) capacity units required to produce previous year output in current year and the previous year capacity units Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking

14) The revenue effect of price recovery is calculated by multiplying the difference in selling price (current year minus the previous year) by ________. A) actual units sold in the current year B) budgeted units sold in the previous year C) budgeted units sold in the current year D) actual units sold in the previous year Answer: A Diff: 2 Objective: 4

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AACSB: Analytical thinking

15) An operating income analysis of Argon Company revealed the following: Operating income for 2014 Add growth component Deduct price-recovery component Add productivity component Operating income for 2015

$1,207,000 102,000 (95,000) 90,000 $1,304,000

Argon's operating income gain is consistent with the ________. A) product differentiation strategy B) product leadership strategy C) cost differentiation strategy D) cost leadership strategy Answer: D Diff: 2 Objective: 4 AACSB: Application of knowledge

16) The cost effect of productivity for variable costs is calculated by multiplying the difference in actual input units used to produce current year output and units of input required to produce current year output in previous year by the ________. A) price per input unit of previous year B) price per unit of capacity in the previous year C) price per unit of capacity in the current year D) price per input unit of current year Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking

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Meale Company makes a household appliance with model number X500. The goal for 2015 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of X500 units that can be produced. The industry market size for appliances increased 10% from 2014 to 2015. The following additional data are available for 2014 and 2015:

Units of X500 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity for X500 (units) Total conversion costs Conversion costs per unit of capacity

2014 10,000 $100 30,000 $10 12,500 $250,000 $20

2015 11,000 $95 29,000 $11 12,000 $240,000 $20

17) What is operating income for 2014? A) $450,000 B) $1,000,000 C) $750,000 D) $700,000 Answer: A Explanation: A) ($100 × 10,000) - [($10 × 30,000) + ($20 × 12,500)] = $450,000 Diff: 2 Objective: 4 AACSB: Application of knowledge

18) What is operating income for 2015? A) $1,045,000 B) $726,000 C) $486,000 D) $476,000 Answer: C Explanation: C) ($95 × 11,000) - [($11 × 29,000) + ($20 × 12,000)] = $486,000 Diff: 2 Objective: 4 AACSB: Analytical thinking

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19) Which of the following statements is true of strategic analysis of operating income? A) Change in operating income from one period to any future period can be subdivided into product differentiation, cost leadership, and growth components. B) Subdividing the change in operating income to evaluate the success of a strategy has no similarity to the variance analysis. C) Management accountants compare actual and budgeted operating performance over the same time periods. D) It focuses on differences in individual categories of costs (direct materials, direct manufacturing labor, and overheads). Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking

Answer the following questions using the information below: Crynton Company makes a household appliance with model number L800. The goal for 2015 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of L800 units that can be produced. The industry market size for appliances increased 5% from 2014 to 2015. The following additional data are available for 2014 and 2015:

Units of L800 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity for L800 (units) Total conversion costs Conversion costs per unit of capacity

2014 30,000 $300 90,000 $30 37,500 $750,000 $60

2015 31,500 $285 87,000 $33 36,000 $720,000 $60

20) What is the revenue effect of the growth component? A) $450,000 U B) $135,000 F C) $135,000 U D) $450,000 F Answer: D Explanation: D) Revenue effect of the growth component = (31,500 - 30,000) × $300 = $450,000 F Diff: 2 Objective: 4 AACSB: Application of knowledge

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21) What is the cost effect of the growth component for direct materials? A) $135,000 U B) $450,000 F C) $450,000 U D) $135,000 F Answer: A Explanation: A) Units of input required to produce 2015 output in 2014 = 90,000 × 31,500/30,000 = 94,500 Cost effect of the growth component for direct materials = (94,500 - 90,000) × $30 = $135,000 U Diff: 3 Objective: 4 AACSB: Application of knowledge

22) What is the cost effect of the growth component for conversion costs? A) $12,500 U B) $0 C) $90,000 U D) $90,000 F Answer: B Explanation: B) Cost effect of the growth component for conversion costs = (37,500 - 37,500) × $60 = $0 Diff: 3 Objective: 4 AACSB: Application of knowledge

23) Overall, was Crynton's strategy successful in 2015? A) Yes, because total revenues increased B) No, because operating income decreased C) No, because direct materials usage per unit increased D) No, because direct material cost per unit decreased Answer: B Explanation: B) Change in revenue (31,500 × $285) - (30,000 × 300) = $22,500 U Change in materials costs (87,000 × $33) - (90,000 × $30) = $171,000 U Change in conversion costs ($720,000 - $750,000) = $30,000 F Change in operating income $163,500 U Diff: 3 Objective: 4 AACSB: Application of knowledge

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Answer the following questions using the information below: Strategic Analysis of Profitability of Ransham Company:

Income Statement Amounts in 2014 Revenues ($) 34,000 Costs 23,500 Operating income 10,500

Revenue and Cost Effects of Growth Component in 2015 10,000 F (a) 5,500 F

Revenue and Cost Effects of Price-Recovery Component in 2015 1,000 U 500 U 1,500 U

Cost Effect of Productivity Component in 2015 (b) (c) 2,400 F

Income Statement Amounts in 2015 (e) 26,100 (d)

24) What is the cost effect of the growth component (a)? A) $15,500 F B) $4,500 U C) $15,500 U D) $4,500 F Answer: B Explanation: B) Cost effect of the growth component = $10,000 F - $5,500 F = $4,500 U Diff: 2 Objective: 4 AACSB: Application of knowledge

25) What is the revenue effect of the productivity component (b)? A) $0 B) $2,400 U C) $900 F D) $2,400 F Answer: A Diff: 3 Objective: 4 AACSB: Application of knowledge

26) What is the cost effect of the productivity component (c)? A) $0 B) $1,200 U C) $900 F D) $2,400 F Answer: D Explanation: D) Cost effect of the productivity component = 2,400 F + $0 = $2,400 Or Cost effect of the productivity component = $10,500 + $4,500 U + $500 U - $16,900 = $2,400 Diff: 3 Objective: 4 AACSB: Application of knowledge

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27) What is the operating income amount for 2015 (d)? A) $43,000 B) $25,000 C) $16,900 D) $46,000 Answer: C Explanation: C) Operating income = $10,500 + $5,500 F - $1,500 U + $2,400 F = $16,900 Diff: 3 Objective: 4 AACSB: Application of knowledge

28) What is the revenue amount for 2015 (e)? A) $9,000 B) $25,000 C) $43,000 D) $16,900 Answer: C Explanation: C) Revenue = $34,000 + $10,000 F - $1,000 U = $43,000 Or Operating income = $10,500 + $5,500 F - $1,500 U + $2,400 F = $16,900 Revenue = $26,100 + 16,900 = $43,000 Diff: 3 Objective: 4 AACSB: Application of knowledge

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Answer the following questions using the information below: Following a strategy of product differentiation, Arseniq Company makes a high-end Appliance, XT15. Arseniq presents the following data for the years 2014 and 2015:

Units of XT15 produced and sold Selling price Direct materials (square feet) Direct materials costs per square foot Manufacturing capacity in units of XT15 Total conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer

2014 50,000 $500 150,000 $50 62,500 $6,250,000 $100 150 $2,250,000 $15,000

2015 52,500 $550 153,750 $55 62,500 $6,875,000 $110 150 $2,343,750 $15,625

Arseniq produces no defective units but it wants to reduce direct materials usage per unit of XT15. Manufacturing conversion costs in each year depend on production capacity defined in terms of XT15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Arseniq had 140 customers in 2014 and 145 customers in 2015. 29) What is operating income for 2014? A) $9,000,000 B) $11,200,000 C) $11,440,000 D) $9,207,000 Answer: A Explanation: A) Total costs = [($50 × 150,000) + ($100 × 62,500) + ($15,000 × 150)] = $16,000,000 Operating income = ($500 × 50,000) - $16,000,000 = $9,000,000 Diff: 3 Objective: 4 AACSB: Application of knowledge

30) What is operating income in 2015? A) $11,440,000 B) $11,200,000 C) $9,000,000 D) $9,207,000 Answer: B Explanation: B) Total costs = [($55 × 153,750) + ($110 × 62,500) + ($15,625 × 150)] = $17,675,000 Operating income = ($550 × 52,500) - $17,675,000 = $11,200,000 Diff: 3 Objective: 4 AACSB: Application of knowledge

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31) What is the change in operating income from 2014 to 2015? A) $2,200,000 U B) $3,875,000 F C) $2,200,000 F D) $3,875,000 U Answer: C Explanation: C) 2014 Total costs = [($50 × 150,000) + ($100 × 62,500) + ($15,000 × 150)] = $16,000,000 Operating income = ($500 × 50,000) - $16,000,000 = $9,000,000 2015 Total costs = [($55 × 153,750) + ($110 × 62,500) + ($15,625 × 150)] = $17,675,000 Operating income = ($550 × 52,500) - $17,675,000 = $11,200,000 Change in operating income = $9,000,000 - $11,200,000 = $2,200,000 F Diff: 3 Objective: 4 AACSB: Application of knowledge

32) What is the revenue effect of the growth component? A) $2,625,000 F B) $1,250,000 U C) $2,625,000 U D) $1,250,000 F Answer: D Explanation: D) Revenue effect of the growth component = (52,500 - 50,000) × $500 = $1,250,000 F Diff: 2 Objective: 4 AACSB: Application of knowledge

33) What is the cost effect of the growth component? A) $375,000 U B) $1,506,250 U C) $1,506,250 O D) $375,000 O Answer: A Explanation: A) Units of input required to produce 2015 output in 2014 = (150,000/50,000) × 52,500 = 157,500 Cost effect of growth for direct materials = (157,500 - 150,000) × $50 = $375,000 U Cost effect of growth for conversion costs = (62,500 - 62,500) × $100 = 0 Cost effect of growth for selling and customer-service costs = (150 - 150) × $15,000 = 0 Cost effect of the growth component = $375,000 U + 0 + 0 = $375,000 U Diff: 3 Objective: 4 AACSB: Application of knowledge

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34) What is the net effect on operating income as a result of the growth component? A) $1,118,750 F B) $875,000 F C) $875,000 U D) $1,118,750 U Answer: B Explanation: B) Net effect on operating income as a result of the growth component = $1,250,000 F + $375,000 U = $875,000 F Diff: 3 Objective: 4 AACSB: Application of knowledge

35) What is the revenue effect of the price-recovery component? A) $2,625,000 U B) $1,250,000 U C) $1,250,000 F D) $2,625,000 F Answer: D Explanation: D) Revenue effect of the price-recovery component = ($550 - $500) × 52,500 = $2,625,000 F Diff: 2 Objective: 4 AACSB: Application of knowledge

36) What is the cost effect of the price-recovery component? A) $375,000 F B) $375,000 U C) $1,506,250 U D) $1,506,250 F Answer: C Explanation: C) Units of input required to produce 2015 output in 2014 = (150,000/50,000) × 52,500 = 157,500 Cost effect of price-recovery for direct materials = ($55 - $50) × 157,500 = $787,500 U Cost effect of price-recovery for conversion costs = ($110 - $100) × 62,500 = $625,000 U Cost effect of price-recovery for selling and customer-service costs = ($15,625 - $15,000) × 150 = $93,750 Cost effect of the price-recovery component = $787,500 U+ $625,000 U+ $93,750 = $1,506,250 U Diff: 3 Objective: 4 AACSB: Application of knowledge

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37) What is the net effect on operating income as a result of the price-recovery component? A) $1,118,750 F B) $875,000 U C) $1,118,750 U D) $875,000 F Answer: A Explanation: A) Net effect on operating income as a result of the price-recovery component = $2,625,000 F + $1,506,250 U = $1,118,750 F Diff: 3 Objective: 4 AACSB: Application of knowledge

38) What is the net effect on operating income as a result of the productivity component? A) $875,000 U B) $206,250 F C) $875,000 F D) $206,250 U Answer: B Explanation: B) Cost effect of productivity for direct materials = (153,750 - 157,500) × $55 = $206,250 F Cost effect of productivity for conversion costs = (62,500 - 62,500) × 110 = 0 Cost effect of productivity for selling and customer-service costs = (150 - 150) × $15,625 = 0 Cost effect of the productivity component = $206,250 F + 0 + 0 = $206,250 F Diff: 3 Objective: 4 AACSB: Application of knowledge

39) An analysis of Baker, Inc.'s operating income for the last two years showed the following: Operating income for 2011 Add growth component Add price-recovery component Deduct productivity component Operating income for 2012

$1,200,000 30,000 200,000 (16,000) $1,414,000

This gain in operating income is consistent with a ________. A) downsizing strategy B) reengineering strategy C) product differentiation strategy D) cost leadership strategy Answer: C Diff: 2 Objective: 4 AACSB: Application of knowledge

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40) Cobalt Company makes a household appliance with model number X500. The goal for 2015 is to improve product design and outlook. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of X500 units that can be produced. The industry market size for appliances increased 10% from 2014 to 2015. The following additional data are available for 2014 and 2015:

Units of X500 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity for X500 (units) Total conversion costs Conversion costs per unit of capacity

2014 20,000 $150 30,000 $10 20,500 $451,000 $22

2015 20,000 $170 32,500 $10 20,500 $493,250 $22.5

Out of the two basic strategies, Cobalt's strategy is ________. A) product differentiation because Cobalt is able to produce a given quantity of output with a lower cost of inputs B) cost leadership because Cobalt is able to produce a given quantity of output with a lower cost of inputs C) cost leadership because Cobalt is able to increase its output price faster than the increase in its input prices D) product differentiation because Cobalt is able to increase its output price faster than the increase in its input prices Answer: D Diff: 2 Objective: 4 AACSB: Application of knowledge

41) When adequate capacity exists in the current year to produce next year's output, the cost effect of growth for capacity-related fixed costs will be zero. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking

42) The price-recovery component of the change in operating income measures solely the effect of price changes on revenues and costs. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking

43) When analyzing the change in operating income, the strategy component of growth will increase when more units are sold. Answer: TRUE Diff: 2 Objective: 4 AACSB: Application of knowledge

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44) The revenue effect of growth is calculated by multiplying the difference in units sold (current year minus the previous year) by selling price in the current year. Answer: FALSE Explanation: The revenue effect of growth is calculated by multiplying the difference in units sold (current year minus the previous year) by selling price in the previous year. Diff: 2 Objective: 4 AACSB: Analytical thinking

45) Cost effect of productivity for fixed costs is calculated by multiplying the difference in units of capacity (current year capacity units minus the previous year capacity units) by price per unit of capacity of the previous year. Answer: FALSE Explanation: Cost effect of productivity for fixed costs is calculated by multiplying the difference in units of capacity, current year capacity units minus the previous year capacity units, by price per unit of capacity of the current year. Diff: 2 Objective: 4 AACSB: Analytical thinking

46) The productivity component measures the amount by which operating income increases by using inputs efficiently to lower costs. Answer: TRUE Diff: 1 Objective: 4 AACSB: Application of knowledge

47) An increase in production capacity will always result in a favorable cost effect of productivity for variable costs in the short run. Answer: FALSE Explanation: An increase in production capacity will have no cost effect of productivity for variable costs, it may affect fixed costs productivity. Diff: 2 Objective: 4 AACSB: Application of knowledge

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48) An analysis of Ruthen Corporation's operating income changes between 2015 and 2016 show the following: Operating income for 2015 Add growth component Deduct price-recovery component Add productivity component Operating income for 2016

$4,750,000 180,000 (60,000) 285,000 $5,155,000

Required: Is Ruthen's operating income gain consistent with the product differentiation or cost leadership strategy? Explain briefly. Answer: Ruthen's operating income gain is consistent with the cost leadership strategy because the increase in operating income was driven by the $285,000 gain in productivity. It appears that Ruthen took advantage of its productivity gain to reduce prices and to fuel growth. Diff: 3 Objective: 4 AACSB: Application of knowledge

49) An analysis of Terbolt Corporation's operating income changes between 2015 and 2016 show the following: Operating income for 2015 Add growth component Add price-recovery component Deduct productivity component Operating income for 2016

$4,750,000 75,000 398,000 (50,000) $5,173,000

Required: Is Terbolt's operating income gain consistent with the product differentiation or cost leadership strategy? Explain briefly. Answer: Terbolt's operating income gain is consistent with the product differentiation strategy because the increase in operating income was driven by the $398,000 gain in the price-recovery component. It appears that Terbolt's superior quality stimulated slight growth and allowed it to charge a price premium for its products. Diff: 3 Objective: 4 AACSB: Application of knowledge

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50) Following a strategy of product differentiation, Sting Corporation makes a high-end computer monitor, CM7. Sting Corporation presents the following data for the years 2012 and 2013:

Units of CM 7 produced and sold Selling price Direct materials (pounds) Direct materials costs per pound Manufacturing capacity for CM7 (units) Conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer

2012 5,000 $400 15,000 $40 10,000 $1,000,000 $100 60 $360,000 $6,000

2013 5,500 $440 15,375 $44 10,000 $1,100,000 $110 58 $362,500 $6,250

Sting Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM7 in 2013. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM7 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Sting Corporation has 100 customers in 2012 and 115 customers in 2013. The industry market size for high-end computer monitors increased 5% from 2012 to 2013. Required: a. What is operating income for 2012? b. What is operating income in 2013? c. What is the change in operating income from 2012 to 2013? Answer: a. ($400 × 5,000) - [($40 × 15,000) + ($100 × 10,000) + ($6,000 × 60)] = $40,000 b.

($440 × 5,500) - [($44 × 15,375) + ($110 × 10,000) + ($6,250 × 58)] = $281,000

c.

$40,000 - $281,000 = $241,000 F

Diff: 3 Objective: 4 AACSB: Application of knowledge

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51) Following a strategy of product differentiation, Sting Corporation makes a high-end computer monitor, CM7. Sting Corporation presents the following data for the years 2012 and 2013:

Units of CM7 produced and sold Selling price Direct materials (pounds) Direct materials costs per pound Manufacturing capacity for CM7 (units) Conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer

2012 5,000 $400 15,000 $40 10,000 $1,000,000 $100 60 $360,000 $6,000

2013 5,500 $440 15,375 $44 10,000 $1,100,000 $110 58 $362,500 $6,250

Sting Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM7 in 2013. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM7 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Ernsting Corporation has 100 customers in 2012 and 115 customers in 2013. The industry market size for high-end computer monitors increased 5% from 2012 to 2013. Required: a. What is the revenue effect of the growth component? b. What is the cost effect of the growth component? c. What is the net effect on operating income as a result of the growth component? Answer: a. (5,500 - 5,000) × $400 = $200,000 F b. 15,000 × 5,500 / 5,000 = 16,500; [(16,500 - 15,000) × $40] + [(10,000 - 10,000) × $100] + [(60 - 60) × $6,000] = $60,000 U c.

$200,000 F + $60,000 U = $140,000 F

Diff: 3 Objective: 4 AACSB: Application of knowledge

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52) Following a strategy of product differentiation, Sting Corporation makes a high-end computer monitor, CM7. Sting Corporation presents the following data for the years 2012 and 2013:

Units of CM7 produced and sold Selling price Direct materials (pounds) Direct materials costs per pound Manufacturing capacity for CM12 (units) Conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer

2012 5,000 $400 15,000 $40 10,000 $1,000,000 $100 60 $360,000 $6,000

2013 5,500 $440 15,375 $44 10,000 $1,100,000 $110 58 $362,500 $6,250

Sting Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM7 in 2012. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM7 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Ernsting Corporation has 100 customers in 2012 and 115 customers in 2013. The industry market size for high-end computer monitors increased 5% from 2012 to 2013. Required: a. What is the revenue effect of the price-recovery component? b. What is the cost effect of the price-recovery component? c. What is the net effect on operating income as a result of the price-recovery component? d. What is the net effect on operating income as a result of the productivity component? Answer: a. ($440 - $400) × 5,500 = $220,000 F b. 15,000 × 5,500 / 5,000 = 16,500; [($44 - $40) × 16,500] + [($110 - $100) × 10,000] + [($6,250 - $6,000) × 60] = $181,000 U c.

$220,000 F + $181,000 U = $39,000 F

d. 15,000 × 5,500 / 5,000 = 16,500; [(15,375 - 16,500) × $44] + [(10,000 - 10,000) × $110] + [(58 - 60) × 6,250] = $62,000 F Diff: 3 Objective: 4 AACSB: Application of knowledge

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53) A company pursuing cost leadership may try to further analyze the change in operating income even when the growth component is highly favorable. Why? Answer: A company pursuing cost leadership may try to further analyze the change in operating income even when the growth component is highly favorable because growth might have been helped by an increase in industry market size. Therefore, at least part of the increase in operating income may be attributable to favorable economic conditions in the industry rather than to any successful implementation of strategy. Some of the growth might relate to a management decision to decrease selling price, made possible by the productivity gains. In this case, the increase in operating income from cost leadership must include operating income from productivity-related growth in market share in addition to the productivity gain. Diff: 2 Objective: 4 AACSB: Analytical thinking

Objective 12.5 1) Engineered costs ________. A) have a no repetitive relationship with output B) have no measurable cause-and-effect relationship between output and resources used C) include research and development and human resource costs D) include a high level of certainty Answer: D Diff: 1 Objective: 5 AACSB: Analytical thinking

2) Which of the following statements is of true engineered costs? A) They arise from periodic (usually annual) decisions regarding the maximum amount to be incurred. B) They have a detailed, physically observable, and repetitive relationship with output. C) They include advertising, executive training, and R&D. D) They have high level of uncertainty. Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking

3) Which of the following statements is true of discretionary costs? A) They arise from day-to-day operational decisions. B) They include conversion cost, direct material costs. C) They have measurable cause-and-effect relationship between output and resources used. D) They have high level of uncertainty. Answer: D Diff: 1 Objective: 5 AACSB: Analytical thinking

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4) ________ have no measurable cause-and-effect relationship between output and resources used. A) Engineered costs B) Discretionary costs C) Marginal costs D) Manufacturing costs Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking

5) Executive training costs is an example of ________. A) engineered costs B) discretionary costs C) downsizing costs D) rightsizing costs Answer: B Diff: 2 Objective: 5 AACSB: Application of knowledge

6) Engineered costs ________. A) possess a high level of uncertainty B) are nonrepetitive C) are from physically observable activities D) have processes that are sketchy or unavailable Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking

7) Conversion costs are an example of ________. A) direct engineered costs B) indirect engineered costs C) discretionary costs D) unused capacity costs Answer: B Diff: 2 Objective: 5 AACSB: Application of knowledge

8) Managers can reduce capacity-based fixed costs by measuring and managing ________. A) unused capacity B) variable costs C) engineered costs D) discretionary costs Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking

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9) It is difficult to determine unused capacity for ________. A) direct engineered costs B) discretionary costs C) variable costs D) marginal costs Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking

Answer the following questions using the information below: Argon Corp. had capacity to produce 15,000 units of L3 using 30,000 kg of direct materials. Argon produced 14,750 units of L3 by processing 27,500 kg of direct materials. Conversion cost per unit is $7.50. Argon can add or reduce manufacturing capacity in increments of 2,500 kgs. 10) What is the cost of unused capacity for conversion costs of Argon? A) $3,750 B) $7,500 C) $9,375 D) $1,875 Answer: C Explanation: C) Conversion costs per kg of direct material = $7.5 / (30,000/15,000) = $3.75 per kg Cost of unused capacity for conversion costs = (30,000 kgs × $3.75) - (27,500 kgs × $3.75) = $9,375 Diff: 2 Objective: 5 AACSB: Application of knowledge

11) What would be the cost savings if Argon decides to reduce manufacturing capacity by 2,500 kgs? A) $9,375 B) $3,750 C) $1,875 D) $7,500 Answer: A Explanation: A) Cost savings = 2,500 kgs × $3.75 = $9,375 Diff: 2 Objective: 5 AACSB: Application of knowledge

12) Which of the following statements is a valid argument for Argon to reduce its manufacturing capacity? A) Argon's strategy is to grow its business as L3 have unlimited demand. B) Argon can call back the expelled employees if the reduced capacity level proves to be insufficient. C) Argon already has a high employee turnover rate and a few more will make no difference. D) Argon wants to reduce product costs as they want to be the cost leaders. Answer: D Diff: 3 Objective: 5 AACSB: Analytical thinking

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13) Direct material cost is an example of ________. A) conversion costs B) discretionary costs C) engineered costs D) downsized costs Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking

14) Downsized capacity is the amount of productive capacity available over and above the productive capacity employed to meet customer demand in the current period. Answer: FALSE Explanation: The amount of productive capacity available over and above the productive capacity employed to meet customer demand in the current period is the unused capacity. Diff: 2 Objective: 5 AACSB: Analytical thinking

15) Discretionary costs arise from periodic (usually annual) decisions regarding the maximum amount to be incurred. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking

16) Discretionary costs are not easily controllable compared to engineered costs. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking

17) Engineered costs contain a higher level of uncertainty than discretionary costs. Answer: FALSE Explanation: Discretionary costs contain a higher level of uncertainty than engineered costs. Diff: 2 Objective: 5 AACSB: Analytical thinking

18) Engineered costs result from a cause-and-effect relationship between the cost driver output and the resources used to produce that output. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking

19) Advertising cost is an example of a discretionary cost. Answer: TRUE Diff: 2

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Objective: 5 AACSB: Analytical thinking

20) It is relatively easy to identify unused capacity for discretionary costs. Answer: FALSE Explanation: It is difficult to identify unused capacity for discretionary costs because of the lack of a cause-and-effect relationship. Diff: 2 Objective: 5 AACSB: Analytical thinking

21) Downsizing is an integrated approach of configuring processes, products, and people to match costs to the activities that need to be performed to operate effectively and efficiently in the present and future. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking

22) Manufacturing overhead cost is an example of indirect engineered costs. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking

23) Downsizing never involves eliminating jobs as it adversely affects employee morale. Answer: FALSE Explanation: Downsizing involves eliminating jobs at times even though it adversely affects employee morale. Diff: 2 Objective: 5 AACSB: Analytical thinking

24) Define engineered and discretionary costs and give two examples of each. Answer: An engineered cost results from a cause-and-effect relationship between the cost driver output and the resources used to produce that output. An example of an engineered cost would be direct materials in the production of products. Other examples of engineered costs might include shipping costs or electrical costs. A discretionary cost has two features. The first feature is that the cost arises from a periodic decision regarding the amount of cost to be incurred. The second feature is that no measurable cause-and-effect relationship exists between the output and the resources used. An example of a discretionary cost would be the cost of advertising for a product, the amount spent on researching new products, or employee training expenses. Diff: 2 Objective: 5 AACSB: Analytical thinking

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25) Can a company identify unused capacity and, if so, how can unused capacity be managed? Answer: It is relatively easy for a company to recognize unused capacity for engineered costs, but it is more difficult for a company to recognize unused capacity for discretionary costs. Downsizing, or rightsizing, is an approach to managing unused capacity by matching costs to the activities that need to be performed. Diff: 2 Objective: 5 AACSB: Analytical thinking

Objective 12.A 1) The lower the inputs for a given set of outputs or the higher the outputs for a given set of inputs, the higher the level of ________. A) overallocation B) expenditure C) productivity D) labor costs Answer: C Diff: 1 Objective: A1 AACSB: Analytical thinking

2) Yield variances ________. A) reveal the effect of substitution within a single factor of production B) address the productivity of a single component of one factor of production C) capture both substitutions between factors of production as well as within factors of production D) reveal the effect of substitution within multiple factors of production Answer: B Diff: 1 Objective: A1 AACSB: Analytical thinking

3) Partial productivity multiplied by the quantity of input used results in ________. A) expected production B) budgeted output C) actual output D) a ratio Answer: C Diff: 1 Objective: A1 AACSB: Analytical thinking

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4) ________ measures the relationship between actual inputs used and actual outputs achieved. A) Strategy map B) Planning variance C) Productivity D) Discretionary costs Answer: C Diff: 1 Objective: A1 AACSB: Analytical thinking

5) Which of the following is the correct mathematical expression to calculate partial productivity? A) Sales value of output produced ÷ Quantity of all inputs used B) Quantity of output produced ÷ Quantity of input used C) Quantity of output produced ÷ Costs of all inputs used D) Sales value of output produced ÷ Cost of inputs required to produce current year production in previous year Answer: B Diff: 2 Objective: A1 AACSB: Analytical thinking

6) Boron Company provided the following information: Budgeted input 82,000 gallons Actual input 82,800 gallons Budgeted production 80,000 units Actual production 81,500 units What is the partial productivity ratio? A) 1.01 units per gallon B) 1.02 units per gallon C) 0.98 units per gallon D) 0.97 units per gallon Answer: C Explanation: C) Partial productivity = 81,500 / 82,800= 0.98 units per gallon Diff: 2 Objective: A1 AACSB: Application of knowledge

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7) Bromint Company provided the following information: Budgeted input 89,500 gallons Actual input 87,700 gallons Budgeted production 42,000 units Actual production 43,000 units What is the partial productivity ratio? A) 2.13 units per gallon B) 0.47 units per gallon C) 0.49 units per gallon D) 2.03 units per gallon Answer: C Explanation: C) Partial productivity = 43,000 / 87,700 = 0.49 units per gallon Diff: 2 Objective: A1 AACSB: Application of knowledge

8) Mintol Company provided the following information: Budgeted input 72,000 gallons Actual input 90,000 gallons Budgeted production 30,000 units Actual production 28,500 units What is the partial productivity ratio? A) 0.32 units per pound B) 0.37 units per pound C) 0.41 units per pound D) 0.39 units per pound Answer: A Explanation: A) Partial productivity = 28,500 / 90,000 = 0.32 units per pound Diff: 2 Objective: A1 AACSB: Application of knowledge

9) Which of the following statements is true of productivity? A) Partial productivity compares the quantity of output produced with the cost of all inputs used. B) Productivity will increase when the partial productivity is high. C) Prices of inputs are incorporated in the partial productivity ratio. D) Partial productivity compares the quantity of output produced with the quantity of all inputs used. Answer: B Diff: 2 Objective: A1 AACSB: Application of knowledge

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10) Answer the following questions using the information below: Nicolt Company produced 120,000 sport jackets during 2015 and 480,000 direct manufacturing laborhours were used at $2 per hour. The conversion costs were $1.2 per jackets produced. What is the direct manufacturing labor partial productivity for Nicolt Company? A) 0.25 unit per direct manufacturing labor-hour B) 0.50 unit per direct manufacturing labor-hour C) 4.00 unit per direct manufacturing labor-hour D) 1.00 unit per direct manufacturing labor-hour Answer: A Explanation: A) Partial productivity = 120,000 / 480,000 = 0.25 Diff: 2 Objective: A1 AACSB: Application of knowledge

11) What is the total factor productivity for Nicolt Company? A) 0.109 units of output per dollar B) 0.250 units of output per dollar C) 0.835 units of output per dollar D) 1.667 units of output per dollar Answer: A Explanation: A) Total factor productivity = 120,000 / ((480,000 × $2) + (120,000 × $1.2) = 0.109 Diff: 3 Objective: A1 AACSB: Application of knowledge

12) Which of the following statements is true of productivity factors? A) Partial-productivity focus on a multiple inputs simultaneously. B) Total factor productivity (TFP) focus on a single input. C) It is the ratio of the quantity of output produced to the costs of all inputs used based on current prices. D) Comparable data for total factor productivity measurements are easily available. Answer: C Diff: 2 Objective: A1 AACSB: Analytical thinking

13) Total factor productivity will increase if ________. A) technical productivity occurs B) the company uses more total inputs per output C) the company incurs fewer costs per input D) current technology becomes obsolete Answer: A Diff: 2 Objective: A1 AACSB: Application of knowledge

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14) Which of the following is the correct mathematical expression to calculate total factor productivity? A) Sales value of output produced ÷ Quantity of all inputs used B) Quantity of output produced ÷ Quantity of the input used C) Quantity of output produced ÷ Costs of all inputs used D) Sales value of output produced ÷ Cost of inputs required to produce current year production in previous year Answer: C Diff: 2 Objective: A1 AACSB: Analytical thinking

15) Which of the following is the correct mathematical expression to calculate a benchmark total factor productivity? A) Quantity of output produced in current year ÷ Costs of inputs at current year prices that would have been used in previous year to produce current year output B) Quantity of output produced in previous year ÷ Costs of inputs at current year prices that would have been used in previous year to produce current year output C) Quantity of output produced in current year ÷ Costs of inputs at previous year prices that would have been used in previous year to produce current year output D) Quantity of output produced in previous year ÷ Costs of inputs at previous year prices that would have been used in previous year to produce current year output Answer: A Diff: 2 Objective: A1 AACSB: Analytical thinking

16) The partial productivity of overhead resources can be measured by considering the cost driver as ________. A) budgeted input B) the denominator C) the fixed input D) the numerator Answer: D Diff: 3 Objective: A1 AACSB: Application of knowledge

17) Which of the following statements is true of productivity measures? A) Partial productivity and total factor productivity measures never work best together. B) Partial productivity explicitly considers gains from using fewer physical inputs as well as substitution among inputs. C) All productivity measures are physical measures lacking financial content. D) Total factor productivity considers the trade-offs across various inputs based on current input prices. Answer: D Diff: 2 Objective: A1 AACSB: Analytical thinking

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18) ________ is an example of a total factor productivity measure. A) The number of units produced per month B) The number of units produced per machine hour C) The number of units produced per labor hour D) The number of units produced per dollar of input cost Answer: D Diff: 2 Objective: A1 AACSB: Application of knowledge

19) Total factor productivity explicitly considers gains from using fewer physical inputs as well as substitution among inputs. Answer: TRUE Diff: 1 Objective: A1 AACSB: Analytical thinking

20) Partial productivity and total factor productivity measures work best together because both measures have the same kind of strengths and weaknesses. Answer: FALSE Explanation: Partial productivity and total factor productivity measures work best together because the strengths of one offset the weaknesses of the other. Diff: 2 Objective: A1 AACSB: Analytical thinking

21) One problem with total factor productivity revolves around the measurement of combined productivity of all inputs. Answer: TRUE Diff: 1 Objective: A1 AACSB: Analytical thinking

22) Productivity describes the relationship between different quantities of inputs consumed and the quantities of output produced. Answer: TRUE Diff: 1 Objective: A1 AACSB: Analytical thinking

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23) Power Company has been unhappy with the financial accounting variances that its cost accounting system has been producing, because its managers believe that there is more to evaluating an operation than just examining accounting numbers. Therefore, it has started gathering data to assist in the examination of nonfinancial results of operations. The following information relates to the manufacture of remote control units for televisions, radios, and stereo components: 2011 80,000 12,000 80,600 $18 $31

Remote control units produced and sold Direct manufacture labor-hours Direct materials used (sets) Direct manufacture cost per hour Direct materials cost per set

2012 100,000 13,200 100,500 $20 $32

Required: a. What is the partial productivity of direct materials for each year? b. What is the partial productivity of direct manufacturing labor for each year? c. Did each area improve between 2011 and 2012? Explain. d. What will be the projected direct material and labor needs for 2013 if remote control units increase by 12,000 units, assuming Power Company applies the constant returns to scale technology? Answer: a. 2011 Partial productivity of direct materials = 80,000/80,600 = 0.993 2012 Partial productivity of direct materials = 100,000/100,500 = 0.995 b.

2011 Partial productivity direct manufacturing labor = 80,000/12,000 = 6.67 2012 Partial productivity direct manufacturing labor = 100,000/13,200 = 7.58

c.

Yes, both areas showed improvement because the ratios went up.

d. Production increase = 12,000/100,000 = 12 percent Projected direct material sets = 100,500 × 1.12 = 112,560 sets Projected direct manufacturing labor = 13,200 × 1.12 = 14,784 hours Diff: 3 Objective: A1 AACSB: Application of knowledge

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24) Grader Company manufactures road graders. Because its managers all have engineering backgrounds, they prefer nonfinancial information for their decision-making models. Therefore, they require the accountants gather data to assist in the examination of nonfinancial results of operations. The following information relates to the manufacture of a paver:

Units produced and sold Direct manufacture labor-hours Direct materials used (tons) Direct manufacture cost per hour Direct materials cost per ton

2011 6,800 136,000 29,000 $21 $431

2012 5,600 115,200 24,400 $22 $443

Required: a. What is the partial productivity for direct materials for each year? b. What is the partial productivity for direct manufacturing labor for each year? c. What is the total factor productivity for each year? Answer: a. 2011 Partial productivity of direct materials = 6,800/29,000 = 0.234 2012 Partial productivity of direct materials = 5,600/24,400 = 0.230 b.

2011 Partial productivity for direct manufacturing labor = 6,800/136,000 = 0.050 2012 Partial productivity for direct manufacturing labor =5,600/115,200 = 0.049

c.

2011 Direct materials = 29,000 × $431 = Direct manufacturing labor = 136,000 × $21 = Total

$12,499,000 2,856,000 $15,355,000

2012 Direct materials = 24,400 × $443 = Direct mfg. labor = 115,200 × $22 = Total

$10,809,200 2,534,400 $13,343,600

2011 Total factor productivity = 6,800/$15,355,000 =

0.00044

2012 Total factor productivity = 5,600/$13,343,600 =

0.00042

Diff: 3 Objective: A1 AACSB: Application of knowledge

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25) Fairytale Weddings manufactures wedding dresses. The following information relates to the manufacture of gowns in its Perth plant:

Units produced and sold Direct manufacture labor-hours Direct materials used (square yards) Direct manufacture cost per hour Direct materials cost per yard

20X1 43,000 22,000 130,000 $16 $10

20X2 52,600 26,000 152,000 $17 $11

Required: Prepare an analysis of change in annual costs from 20X1 to 20X2 including direct materials, direct manufacturing labor, and total inputs. Answer: Direct materials: Actual 20X1 costs: 130,000 × $10 = $1,300,000 20X1 input for 20X2 output: 130,000 × 52,600/43,000 × $10 = 1,590,233 Output adjustment $ 290,233 U 20X1 input for 20X2 output: = 20X1 input with 20X2 costs: 130,000 × 52,600/43,000 × $11 = Input price change

$1,590,233 1,749,256 $ 159,023 U

20X1 input with 20X2 costs: = 20X2 costs: 152,000 × $11 = Productivity change

$1,749,256 1,672,000 $ 77,256 F

Direct manufacturing labor: Actual 20X1 costs: 22,000 × $16 = 20X1 input for 20X2 output: 22,000 × 52,600/43,000 × $16 = Output adjustment

$352,000 430,586 $ 78,586 U

20X1 input for 20X2 output: = 20X1 input with 20X2 costs: 22,000 × 52,600/43,000 × $17 = Input price change

$430,586 457,498 $ 26,912 U

20X1 input with 20X2 costs: = 20X2 costs: 26,000 × $17 = Productivity change

$457,498 442,000 $ 15,498 F

All inputs: Output adjustment: $290,233 U + $78,586 U = Input price change: $159,023 U + $26,912 U = Productivity change: $77,256 F + $15,498 F =

$368,819 U $185,935 U $ 92,754 F

Diff: 3 Objective: A1 AACSB: Application of knowledge

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26) Ralph Company has been very aggressive in developing various types of financial and nonfinancial measurement schemes to help with the evaluation of its manufacturing processes. It appears that some of the managers are suboptimizing in that their decision processes are geared solely for their department's benefit, sometimes to the detriment of the organization as a whole. Required: What changes in the evaluation system could the company implement to help minimize the suboptimization of the managers' decision-making process? Answer: The company could implement a total factor productivity concept. Its major advantage is that it measures the combined productivity of all inputs to produce outputs and, therefore, explicitly evaluates substitution among inputs. For example, if buying a cheap material makes the cost of materials look favorable but causes more labor-hours, therefore causing labor costs to be unfavorable, suboptimization may be occurring. The total factor productivity takes into account both the materials costs and the labor costs and if they offset each other, that is fine, but if they do not offset, then the variance will be so noted. Diff: 2 Objective: A1 AACSB: Application of knowledge

27) Total factor productivity (TFP) is easy to compute for a single-product company. When dealing with a multiproduct company, one of two adjustments must be made. What are these potential adjustments? Answer: One of the following two adjustments must be made in the TFP calculations: 1. Convert the outputs from physical measures to a dollar value common denominator, analogous to the multiple input case. 2. Allocate the input costs to the different outputs. This is appropriate when the inputs can be reasonably allocated to the different outputs. Diff: 2 Objective: A1 AACSB: Analytical thinking

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