Question 1

A company is considering the development of a new product. The lower it is able to set the product price, the higher the product's value proposition will be.

Accepted Answer

A lower product price can make the product more attractive to consumers by offering a better cost-benefit ratio, thus enhancing its value proposition.

Question 2

The difference between target price and estimated product cost is referred to as the cost gap.

Accepted Answer

False

Question 3

The attainment phase of target costing focuses on eliminating the cost gap.

Accepted Answer

The attainment phase of target costing is indeed focused on eliminating the cost gap, which is the difference between the target cost and the estimated actual cost, by finding ways to reduce costs through design changes, efficiency improvements, and other cost reduction strategies.

Question 4

Green Valley Coffee Company has designed a new coffee maker for its existing product line. The company estimates that the unit cost to produce the machine will be $40. This is within its target cost of $48. A pilot production run, however, results in an actual unit cost of $46. Green Valley Coffee faces a cost gap of $6.

Accepted Answer

The cost gap is calculated as the difference between the target cost and the actual cost. Since the target cost is $48 and the actual cost is $46, there is no cost gap; instead, the actual cost is within the target, resulting in a $2 margin below the target cost, not a gap.

Question 5

If standards for product costs are set too tight, they may lead to dysfunctional behavior as workers take shortcuts to meet those standards.

Accepted Answer

Setting standards for product costs too tight can pressure workers to meet unrealistic goals, leading them to take shortcuts that may compromise quality, safety, or ethical standards, leading to dysfunctional behavior within the organization.

Question 6

The material price variance is computed by weighting the difference between the actual price of a raw material and its standard price by the quantity of material allowed for the actual output achieved.

Accepted Answer

The material price variance is computed by weighting the difference between the actual price of a raw material and its standard price by the actual quantity of material purchased.

Question 7

A production scheduling error that results in the unanticipated use of overtime labor will result in an unfavorable labor rate variance.

Accepted Answer

An unfavorable labor rate variance occurs when the actual labor rate paid is higher than the standard labor rate. Overtime labor is typically paid at a higher rate than regular labor, so using overtime labor will result in an unfavorable labor rate variance.

Question 8

A continuous improvement program will focus only on financial measures of production performance.

Accepted Answer

A continuous improvement program focuses on various aspects of performance, including quality, efficiency, customer satisfaction, and employee engagement, not just financial measures.

Question 9

External product quality failures will typically prove more costly than internal product quality failures.

Accepted Answer

External product quality failures, once the product has reached the customer, often lead to returns, warranty claims, and damage to brand reputation, which can be significantly more costly than detecting and fixing issues internally before the product is shipped.

Question 10

Scrapped units and rework are typical costs of an internal product quality failure.

Accepted Answer

Scrapped units and rework are costs incurred when a product does not meet quality standards initially, requiring either disposal (scrapping) or additional work (rework) to meet those standards, thus representing internal product quality failure costs.

Question 11

The radar chart is the most useful device for highlighting which of several product or process failures is the most significant problem facing the firm.

Accepted Answer

The radar chart is useful for displaying multivariate data in a way that is easy to understand, especially for comparing multiple items across various variables. However, it is not specifically designed to highlight which problem is the most significant, as it does not inherently prioritize issues or indicate significance without additional context or analysis.

Question 12

The value of cost-volume-profit analysis is limited because it is incapable of adequately incorporating nonfinancial issues into its calculations.

Accepted Answer

Cost-volume-profit (CVP) analysis primarily focuses on how profits are affected by several factors such as sales volume, selling prices, variable costs, and fixed costs, without directly addressing nonfinancial issues like customer satisfaction, employee morale, or brand reputation.

Question 13

A process change will reduce unit variable cost while leaving the product price and total fixed cost unchanged. This will necessarily reduce the product's breakeven volume.

Accepted Answer

A reduction in unit variable cost decreases the cost per unit produced, without affecting the selling price or total fixed costs, thereby lowering the breakeven volume. This is because the breakeven volume is calculated by dividing the total fixed costs by the difference between the selling price per unit and the variable cost per unit. When the variable cost per unit decreases, this difference increases, leading to a lower breakeven volume.

Question 14

A poorly performing new product will harm the entity by reducing the sales volumes of complementary products.

Accepted Answer

A poorly performing new product can negatively impact the sales of complementary products because customers may lose confidence in the brand or be less inclined to purchase items that are associated with or enhance the use of the poorly performing product.

Question 15

Harrier Company is considering an opportunity to outsource the production of a compressor used in its residential air conditioning units. If it does so, a production supervisor will be deployed elsewhere in the company. The supervisor's salary is an example of a relevant cost.

Accepted Answer

The supervisor's salary is not a relevant cost in the decision to outsource the compressor production because it will be incurred regardless of the decision; the supervisor will still be paid the same salary by being deployed elsewhere in the company.

Question 16

From the perspective of the customer, the difference between the perceived worth of a product and its selling price is referred to as the product's:
A) Gross profit margin.
B) Contribution margin.
C) Value proposition.
D) Operating income.

Accepted Answer

The value proposition refers to the difference between the perceived worth of a product to a customer and its selling price, highlighting the unique value the product offers compared to its cost.

Question 17

The attainment phase of target costing focuses on:
A) Eliminating the cost gap.
B) Establishing the target price.
C) Developing a target cost based on expected profit.
D) Pareto analysis of product failures.

Accepted Answer

The attainment phase of target costing primarily focuses on eliminating the cost gap, which is the difference between the current cost of the product and the target cost. This involves implementing cost reduction strategies to meet the target cost objectives.

Question 18

The cost gap is the difference between a product's:
A) Value proposition and selling price.
B) Target cost and estimated cost.
C) Standard cost and actual cost.
D) Target price and expected profit.

Accepted Answer

The cost gap refers to the difference between the target cost (what a company aims to spend on producing a product) and the estimated cost (what the company actually expects to spend based on current data). This gap indicates how much a company needs to reduce its costs to meet its target.

Question 19

Of the following types of costs, which is not a candidate for improvement during the attainment phase of target costing?
A) Material costs.
B) Conversion costs.
C) Activity costs.
D) Preproduction costs.

Accepted Answer

Preproduction costs are not typically a candidate for improvement during the attainment phase of target costing because this phase focuses on reducing costs through design and development, and preproduction costs are incurred before this phase begins.

Question 20

The internal process focused on bringing together all of the parts needed to produce the product is termed:
A) Kit materials.
B) Conversion.
C) The product establishment phase.
D) The attainment phase.

Accepted Answer

Kit materials refer to the process of gathering all necessary components required to assemble or produce a product. This internal process is crucial for ensuring that all parts are available for efficient production.

Quiz 7: Assessing and Improving Product Profitability