Deck 14: The Strategic Management of Costs and Revenues

Question 1

In kaizen costing, after targeted cost reduction goals are set, each department is assigned responsibility for specific cost reduction amounts.

Answer 1

A

Question 2

Target costing works best when production processes are simple, rather than complex.

Answer 2

B

Question 3

Kaizen costing is a technique aimed at improvement of short-term profitability.

Answer 3

B

Question 4

A target cost is the minimum cost a company should strive for to obtain its desired profit margin.

Question 5

The decisions made during the design phase affect a large portion of product and manufacturing process costs. Therefore, target costing focuses on the design phase.

Question 6

Kaizen costing is concerned with continuous improvement in product cost, quality, and functionality.

Question 7

Focusing on the customers or clients as the cost object may reveal useful insights for improving organisational performance.

Question 8

Life cycle costing focuses on costs incurred in production, but not on those incurred when an operation is closed down and requires costly clean-up activities.

Question 9

If an organisation is able to charge extra to a customer who consumes greater company resources then the fact that they require extra servicing is not a problem.

Question 10

Customers that are found to be the least profitable should be dropped.

Question 11

The supply chain involves suppliers, but not customers.

Question 12

Life cycle costing is used when a product is initially sold at a high profit.

Question 13

Kaizen costing relies on price forecasts.

Question 14

Target costing involves not only cost, but also product quality and functionality.

Question 15

A value chain is the sequence of business processes in which value is added to a product or a service.

Question 16

Kaizen costing and target costing are two names for the same thing.

Question 17

Target costing is a technique to improve long-term profitability by considering product costs at the design phase.

Question 18

Because inventory level information is in a company's internal accounting records, suppliers cannot access it.

Question 19

Life cycle costing is an alternative to job order and process costing.

Question 20

Life cycle costing considers cash flows over the entire life of products that have high development or decommissioning costs.

Question 21

Which of these activities is not typically considered to be part of a manufacturing organisation's value chain?

A) Handling customer complaints
B) Designing and engineering new products
C) Making journal entries
D) Manufacturing products

Question 22

In an economic downturn, a problem with cost-based pricing is a potential death spiral.

Question 23

Not-for-profit organisations price products in the same manner as for-profit organisations.

Question 24

Peak load pricing refers to the illegal practice of charging different prices at different times to reduce capacity constraints.

Question 25

Market-based prices are typically based on some measure of customer demand.

Question 26

The Internet can often give suppliers information about their customers' inventory levels. Suppliers can then use this information to: I $\quad$ Time deliveries to their customers
II $\quad$ Improve their own production planning
III $\quad$ Prepare financial statements

A) II and III
B) I and III
C) I and II
D) I, II, and III

Question 27

Market-based prices are influenced by product differentiation and competition.

Question 28

The sales price variance is calculated as (actual price - standard price) X actual volume sold.

Question 29

To establish a cost-based price, managers need data on consumer demand.

Question 30

Implementing a computer application to reduce non-value added paperwork and improve inventory tracking would result most directly from

A) Kaizen costing
B) Value chain analysis
C) Target costing
D) Life cycle budgeting

Question 31

In cost-based pricing, managers must use only variable costs in the cost base.

Question 32

Life cycle costing is incompatible with activity-based costing.

Question 33

More profitable customers are more likely to:

A) pay on time
B) demand discounts
C) place more small orders
D) return goods more frequently

Question 34

Variance analysis can be used for both costs and revenues.

Question 35

A penetration price is the price charged for transactions that take place within a single organisation.

Question 36

Which of the following activities is unique to a manufacturing organisation's value chain?

A) Customer service
B) Product manufacture
C) Distribution management
D) Marketing and sales

Question 37

In cost-based pricing, mark-up percentages often originate from general industry practice.

Question 38

The statement concerning customer profitability analysis that is not true is:

A) The customer or customer groupings become the cost object
B) There is not normally a connection between more profitable products or services and more profitable customers
C) To conduct this analysis it is necessary to identify the resources consumed and the associated costs of servicing customers
D) None of the above, i.e. all the statements are true

Question 39

Which of the following immediately follows product and process design in the typical manufacturing value chain?

A) Supplier and raw material management
B) Distribution management
C) Research and development
D) Marketing and sales

Question 40

For many organisations:
A) a relatively large number of clients make little contribution to profitability

A) and b are correct
B) profit comes fairly evenly from their clients
C) a relatively small number of customers will generate most of the profitability

Question 41

Emily is an accountant for CLC. Her boss has asked her to participate in a target costing project for a pen that will write upside down. Which of the following information sources would Emily use to determine a competitive price?

A) Reverse-engineering reports
B) Life cycle costing analyses
C) Consumer surveys
D) Emily does not need to determine a competitive price because the project is focused on a target cost

Question 42

Which of the following steps occurs first in a target costing design cycle?

A) Make product design choices to achieve the target cost.
B) Determine the target cost.
C) Evaluate feasibility using a pilot project.
D) Determine product target price, quality, and functionality.

Question 43

PLM's managers are attempting to build a new product, a better mousetrap. They began by determining the features customers wanted and what they would pay for those features. PLM's engineers then reverse-engineered a competitor's product to understand its design and related production processes. Their analysis indicated that customers would pay $10.00 for a better mousetrap. What process did PLM use according to the preceding scenario?

A) Value chain costing
B) Target costing
C) Kaizen costing
D) Life cycle costing

Question 44

Target costing is most likely to be successful when the:

A) Product is a commodity
B) Production process is complex
C) Manufacturer is solely responsible for managing costs
D) Managers and accountants make all of the decisions

Question 45

Kaizen costing is:

A) Focused only on cost reduction
B) Continuous improvement in cost, quality, and functionality
C) Another name for target costing
D) A method for budgeting

Question 46

PLM's managers are attempting to build a new product, a better mousetrap. They began by determining the features customers wanted and what they would pay for those features. PLM's engineers then reverse-engineered a competitor's product to understand its design and related production processes. Their analysis indicated that customers would pay $10.00 for a better mousetrap. Why was it important for PLM's engineers to understand the product design and production processes of its competitor?

A) They needed to explain them to customers to justify the better mousetrap's cost
B) The better mousetrap will only succeed if it is identical to their competitor's product
C) Most of the mousetrap's product costs are committed by that point in the value chain
D) Understanding product design and production processes is not typically important; the engineers just wanted to better understand the process.

Question 47

In target costing, managers can:

A) Push some cost reductions to suppliers
B) Try to establish their product as a commodity
C) Focus on motivating customers to pay a higher price
D) Justify higher costs by making production processes more complex

Question 48

When does kaizen costing typically occur?

A) After the product has been designed, but before the first production cycle is complete
B) After the product has been designed and after the first production cycle is complete
C) Before the product has been designed
D) After the first production cycle is complete, but before the product has been designed

Question 49

Kaizen costing concepts can be applied to:

A) Fixed costs only
B) Both variable and fixed costs
C) Variable costs only
D) Mixed costs only

Question 50

Which of the following industries is least likely to implement target costing?

A) Heavy equipment manufacturers
B) Car manufacturers
C) Food products and beverages
D) Bicycle manufacturers

Question 51

Under kaizen costing, accountants forecast:

A) Cost reduction goals and desired profit margins, then adjust prices accordingly
B) Declining profit margins and establish revenue and cost goals to meet them
C) Declining prices and establish cost reduction goals to maintain a desired profit margin
D) Increasing profit margins and establish revenue and cost goals to meet them

Question 52

Kaizen costing relies on:

A) Commodity markets
B) Zero-based budgeting processes
C) Sales forecasts of prices and volumes
D) Classification based on cost behaviour

Question 53

PNY currently sells its primary product for $85 per unit, with a profit margin of 30%. Cost of goods sold totals 40% of the product's total cost. PNY's managers are considering implementing a kaizen costing system. PNY's current product cost (direct costs and manufacturing overhead) per unit is:

A) $59.50
B) $23.80
C) $25.50
D) $15.30

Question 54

After establishing a target cost for a product or service, managers assemble a product design team. The product design team usually comprises: I $\quad$ Product engirieers
II $\quad$ Marketing personnel
III $\quad$ Accountants

A) I and III
B) II and III
C) I and II
D) I, II, and III

Question 55

PLM's managers are attempting to build a new product, a better mousetrap. They began by determining the features customers wanted and what they would pay for those features. PLM's engineers then reverse-engineered a competitor's product to understand its design and related production processes. Their analysis indicated that customers would pay $10.00 for a better mousetrap. If PLM's required profit margin is 25%, the target cost of a better mousetrap is:

A) $7.50
B) $12.50
C) $2.50
D) None of the above

Question 56

Consumer surveys, focus groups, and market research are:

A) Information sources for target costing projects.
B) Always part of a company's value chain.
C) Value-added activities.
D) Information sources for cost-based pricing.

Question 57

Managers can achieve planned cost reductions in a kaizen costing system through:
I $\quad$ Value chain analysis
II $\quad$ Gain-sharing programs with employees
III $\quad$ Supply chain analysis

A) I and III
B) II and III
C) I and II
D) I, II, and III

Question 58

PNY currently sells its primary product for $85 per unit, with a profit margin of 30%. Cost of goods sold totals 40% of the product's total cost. PNY's managers are considering implementing a kaizen costing system. If PNY is successful in achieving its kaizen goal, the reduced nonmanufacturing cost (i.e., the cost excluding the product cost) per unit will be:

A) $28.56
B) $19.04
C) $47.60
D) $20.40

Question 59

PNY currently sells its primary product for $85 per unit, with a profit margin of 30%. Cost of goods sold totals 40% of the product's total cost. PNY's managers are considering implementing a kaizen costing system. As part of its kaizen costing project, PNY's accountants estimate the price of the product will decline by 20% next year. To maintain the same profit margin, the total cost per unit will have to be reduced by:

A) Exactly 20%
B) More than 20%
C) Less than 20%
D) Cannot be determined

Question 60

Kaizen costing is similar to a budget except that kaizen costing:

A) Cannot be implemented in service organisations
B) Requires the use of the high-low method to forecast revenues
C) Does not use dollar amounts
D) Provides for explicit cost reductions

Question 61

When an organisation using market-based prices cannot differentiate its product due to extensive competition, the product:

A) Is considered a regulated price
B) Involves more non-value-added activities than value-added activities
C) Is considered a commodity
D) Cannot be sold at a profit

Question 62

Which of the following formulas calculates the profit-maximising price?

A) (Total variable cost + total fixed cost) / price elasticity of demand
B) Variable cost × [elasticity / (elasticity + 1)]
C) Total variable cost + total fixed cost
D) Total cost × [elasticity / (elasticity + 1)]

Question 63

Which of the following formulas calculates price elasticity of demand?

A) (1 + % change in quantity sold) / (1 + % change in price)
B) % change in quantity sold / % change in price
C) ln (1 + % change in quantity sold) / ln (1 + % change in price)
D) ln (1 - % change in quantity sold) / ln (1 - % change in price)

Question 64

TMG produces and sells yachts for wealthy customers. TMG's accountants produced the data shown below as a basis for client negotiations for the coming year: $\begin{array}{lccc}&\underline{\text { Big Winner}}&\underline{\text { Sport Star }} &\underline{\text {CEO }}\\\text { Basic yacht } & \$ 600 & \$ 600 & \$ 600 \\\text { Customisation costs } & 300 & 500 & 200 \\\text { Marketing costs } &\underline{ 100 }&\underline{ 400} & \underline{300 }\\\quad \text { Total costs } &\underline{ \$ 1,000} & \$ \underline{\$ 1,500}&\underline{ \$ 1,100 }\end{array}$
Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. TMG's managers want to achieve a profit margin of 80% based on total costs. If unavoidable costs are allocated as a percentage of avoidable costs, the total cost of Sport Star's yacht will be:

A) $2,300
B) $1,833
C) $1,500
D) $1,167

Question 65

TMG produces and sells yachts for wealthy customers. TMG's accountants produced the data shown below as a basis for client negotiations for the coming year: $\begin{array}{lccc}&\underline{\text { Big Winner}}&\underline{\text { Sport Star }} &\underline{\text {CEO }}\\\text { Basic yacht } & \$ 600 & \$ 600 & \$ 600 \\\text { Customisation costs } & 300 & 500 & 200 \\\text { Marketing costs } &\underline{ 100 }&\underline{ 400} & \underline{300 }\\\quad \text { Total costs } &\underline{ \$ 1,000} & \$ \underline{\$ 1,500}&\underline{ \$ 1,100 }\end{array}$

Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. TMG's managers want to achieve a profit margin of 80% based on total costs. TMG's system is best described as:

A) Life cycle costing
B) Cost-based pricing
C) Market-based pricing
D) Kaizen costing

Question 66

Life cycle costing can be used to focus managers' attention on:
I $\quad$ Development costs
II $\quad$ Decommissioning costs
III $\quad$ Marketing costs

A) I and III
B) II and III
C) I and II
D) I, II and III

Question 67

Which of these factors affect a product's profit-maximising price? I $\quad$ Fixed costs
II $\quad$ Price elasticity of demand
III $\quad$ Variable costs

A) II and III
B) I and II
C) I and III
D) I, II, and III

Question 68

Market-based prices are least likely to be influenced by:

A) Competition
B) Whether or not the product is a commodity
C) The degree of product differentiation
D) The cost to produce the product

Question 69

Which of the following is a formal method for incorporating demand into prices?

A) Market-based pricing
B) Price elasticity of demand
C) Cost-based pricing
D) Price elasticity of supply

Question 70

Managers determine what a customer is willing to pay for a product or service under which one of these pricing method?

A) Cost-based
B) Activity-based
C) Market-based
D) Life cycle

Question 71

TMG produces and sells yachts for wealthy customers. TMG's accountants produced the data shown below as a basis for client negotiations for the coming year: $\begin{array}{lccc}&\underline{\text { Big Winner}}&\underline{\text { Sport Star }} &\underline{\text {CEO }}\\\text { Basic yacht } & \$ 600 & \$ 600 & \$ 600 \\\text { Customisation costs } & 300 & 500 & 200 \\\text { Marketing costs } &\underline{ 100 }&\underline{ 400} & \underline{300 }\\\quad \text { Total costs } &\underline{ \$ 1,000} & \$ \underline{\$ 1,500}&\underline{ \$ 1,100 }\end{array}$

Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. TMG's managers want to achieve a profit margin of 80% based on total costs. Which customer's yacht will have the lowest total cost if unavoidable costs are allocated based on the cost of a basic yacht?

A) Sport Star
B) CEO
C) Big Winner
D) Costs will be equal for all three customers

Question 72

PNG's managers estimate that a 50% increase in price would cause an 80% reduction in the quantity of product sold. Total fixed costs for the product are $5,000 and total variable costs are $4,000, based on production of 400 units. The following values may be useful: PNG's profit maximising price is:

A) $3.37
B) $7.57
C) $2.44
D) $13.36

Question 73

The internet is likely to:

A) Have no impact on price elasticity of demand because few people do business on the Internet
B) Increase price elasticity of demand because of the availability of substitute products
C) Decrease price elasticity of demand because transactions are numerous and quick
D) Decrease price elasticity of demand because of the availability of complementary products

Question 74

Market-based prices are influenced by all of the following except:

A) Product differentiation
B) Competition
C) Customer demand
D) Allocated costs

Question 75

Although products are initially sold at a loss, under life cycle costing managers usually expect:
I $\quad$ Sales volume increases for the product or related products over time
II $\quad$ A shift to a commodity market over time
III $\quad$ Cost reductions ouet time

A) II and III
B) I and III
C) I and II
D) I, II, and III

Question 76

TMG produces and sells yachts for wealthy customers. TMG's accountants produced the data shown below as a basis for client negotiations for the coming year: $\begin{array}{lccc}&\underline{\text { Big Winner}}&\underline{\text { Sport Star }} &\underline{\text {CEO }}\\\text { Basic yacht } & \$ 600 & \$ 600 & \$ 600 \\\text { Customisation costs } & 300 & 500 & 200 \\\text { Marketing costs } &\underline{ 100 }&\underline{ 400} & \underline{300 }\\\quad \text { Total costs } &\underline{ \$ 1,000} & \$ \underline{\$ 1,500}&\underline{ \$ 1,100 }\end{array}$

Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. TMG's managers want to achieve a profit margin of 80% based on total costs. Suppose TMG allocates unavoidable corporate costs based on total avoidable costs. The selling price of Sport Star's yacht will be:

A) $3,300
B) $1,467
C) $1,833
D) $2,200

Question 77

Market-based prices are normally determined using some measure of:

A) Supplier demand
B) Customer demand
C) Supplier prices
D) Degree of governmental regulation

Question 78

Life cycle costing can be used to identify unprofitable products due to high costs at the end of a product's life. Which of the following is the best example of such a product?

A) Cherry orchards
B) Accounting firms
C) Nuclear reactors
D) Universities

Question 79

PLM's managers have recently introduced new, more efficient equipment for feeding chickens. Under which of the following assumptions would life cycle costing be best applied?

A) The product is being sold at a small profit
B) The product is being sold at a loss, but expected to add to profits over time
C) The product is being sold at a loss
D) The product is being sold at a small profit, which is expected to decline over time

Question 80

Life-cycle costing is a:

A) Decision-making method that considers a target cost
B) Decision-making method that considers improvements in cost and quality over a product's life
C) Decision-making method that considers costs from the time the product is introduced through a number of years
D) Pricing method based on demand