Chapter 12 Strategy Balanced Scorecard A PDF

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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'ʹs 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'ʹs 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

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'ʹ product prices from
its competitors.
B) It is an organization'ʹs 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'ʹ raw materials from
its competitors.
D) It is an organization'ʹs 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
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4) While doing industry analysis on five forces, which of the following is a force that shapes an
organization'ʹs 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

5) ________ is an organization'ʹs 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

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

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

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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
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'ʹs 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'ʹs strategy is ________.
A) product differentiation
B) product leadership
C) cost differentiation
D) cost leadership
Answer: D
Diff: 2
Objective: 1

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

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

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

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

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

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

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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'ʹs 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 long-‐‑
term 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
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'ʹs 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

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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
C) Product designing
D) Reengineering
Answer: D
Diff: 1
Objective: 2

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

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
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

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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

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

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

Objective 12.3

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

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

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

5) Which of the following statements is true of a balanced scorecard?
A) The balanced scorecard reduces managers'ʹ emphasis on long-‐‑run financial performance.
B) The balanced scorecard reduces managers'ʹ 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
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; learning-‐‑
and-‐‑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'ʹs main competitors standards.
D) Internal-‐‑business-‐‑process perspective is composed of three subprocesses: operations process; learning-‐‑
and-‐‑growth process; and postsales-‐‑service process.
Answer: C
Diff: 3
Objective: 3

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7) Which of the following statements best relates to the balanced scorecard'ʹs 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

8) Which of the following statements best relates to the balanced scorecard'ʹs 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

9) Which of the following statements best relates to the balanced scorecard'ʹs 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
10) ________ is a measure of the balanced scorecard'ʹs financial perspective.
A) Service response time
B) Number of new patents
C) Operating income
D) Defect rates
Answer: C
Diff: 2
Objective: 3

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

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

13) ________ perspective of the balanced scorecard focuses on a company'ʹs 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

14) ________ is a measure of the balanced scorecard'ʹs 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
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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16) ________ is a measure of the balanced scorecard'ʹs 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

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

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
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

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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

21) The time taken to fulfill clients'ʹ requests is an example of the ________ measure of a balanced-‐‑
scorecard.
Answer: B
Diff: 2
Objective: 3

22) The operating capabilities is an example of the ________ measure of a balanced-‐‑scorecard.
Answer: A
Diff: 2
Objective: 3

23) The employee turnover rates is an example of the ________ measure of a balanced-‐‑scorecard.
Answer: C
Diff: 2
Objective: 3
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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

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

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

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

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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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

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

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

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

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

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

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

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'ʹs 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'ʹs strategy is one of product differentiation because the company plans to offer a product that is
superior and unique from the competition.

The company'ʹs 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
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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'ʹs 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'ʹs 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'ʹs 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
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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
2. market share
3. gross margin percentage
4. defect rates
5. customer satisfaction
6. information system availability
7. new-‐‑product development time
8. revenue growth
9. employee turnover rates
10. setup time
Answer:
1. internal-‐‑business-‐‑process
2. customer
3. financial
5. customer
6. learning-‐‑and-‐‑growth
8. financial
9. learning-‐‑and-‐‑growth
Diff: 3
Objective: 3

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'ʹs 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
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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'ʹs 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 internal-‐‑
business-‐‑process improvement targets after benchmarking against the company'ʹs 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

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

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
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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

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

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

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
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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

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

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

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
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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

12) Assuming previous year'ʹs 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

13) Assuming previous year'ʹs 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

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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15) An operating income analysis of Argon Company revealed the following:

Operating income for 2014 $1,207,000
Add growth component 102,000
Deduct price-‐‑recovery component (95,000)
Add productivity component 90,000

Argon'ʹs 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

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
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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:

2014 2015
Units of X500 produced and sold 10,000 11,000
Selling price $100 $95
Direct materials (square feet) 30,000 29,000
Direct material costs per square foot $10 $11
Manufacturing capacity for X500 (units) 12,500 12,000
Total conversion costs $250,000 $240,000
Conversion costs per unit of capacity $20 $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

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

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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
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:

2014 2015
Units of L800 produced and sold 30,000 31,500
Manufacturing capacity for L800 (units) 37,500 36,000

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

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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
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

23) Overall, was Crynton'ʹs 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

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Strategic Analysis of Profitability of Ransham Company:

Revenue and Revenue and
Income Cost Effects Cost Effects of Cost Effect of Income
Statement of Growth Price-‐‑Recovery Productivity Statement
Amounts Component Component Component Amounts
in 2014 in 2015 in 2015 in 2015 in 2015
Revenues ($) 34,000 10,000 F 1,000 U (b) (e)
Costs 23,500 (a) 500 U (c) 26,100
Operating
income 10,500 5,500 F 1,500 U 2,400 F (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
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

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

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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

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
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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:

2014 2015
Units of XT15 produced and sold 50,000 52,500
Direct materials costs per square foot $50 $55
Manufacturing capacity in units of XT15 62,500 62,500
Total conversion costs $6,250,000 $6,875,000
Selling and customer-‐‑service capacity (customers) 150 150
Total selling and customer-‐‑service costs $2,250,000 $2,343,750
Selling and customer-‐‑service capacity cost per customer $15,000 $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.

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

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
Diff: 3
Objective: 4
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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
2015
Total costs = [($55 × 153,750) + ($110 × 62,500) + ($15,625 × 150)] = $17,675,000
Change in operating income = $9,000,000 -‐‑ $11,200,000 = $2,200,000 F
Diff: 3
Objective: 4

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

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
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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

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

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
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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

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

39) An analysis of Baker, Inc.'ʹs operating income for the last two years showed the following:

Add price-‐‑recovery component 200,000
Deduct productivity component (16,000)

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
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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:

2014 2015
Units of X500 produced and sold 20,000 20,000
Manufacturing capacity for X500 (units) 20,500 20,500
Conversion costs per unit of capacity $22 $22.5

Out of the two basic strategies, Cobalt'ʹs 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

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

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

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
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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

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

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

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
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48) An analysis of Ruthen Corporation'ʹs operating income changes between 2015 and 2016 show the
following:

Deduct price-‐‑recovery component (60,000)
Add productivity component 285,000

Required:
Is Ruthen'ʹs operating income gain consistent with the product differentiation or cost leadership strategy?
Explain briefly.
Answer: Ruthen'ʹs 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

49) An analysis of Terbolt Corporation'ʹs operating income changes between 2015 and 2016 show the
following:

Add price-‐‑recovery component 398,000
Deduct productivity component (50,000)

Required:
Is Terbolt'ʹs operating income gain consistent with the product differentiation or cost leadership strategy?
Explain briefly.
Answer: Terbolt'ʹs 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'ʹs superior quality stimulated slight growth and allowed it to charge a price premium
for its products.
Diff: 3
Objective: 4
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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:

2012 2013
Units of CM 7 produced and sold 5,000 5,500
Direct materials (pounds) 15,000 15,375
Direct materials costs per pound $40 $44
Manufacturing capacity for CM7 (units) 10,000 10,000
Conversion costs $1,000,000 $1,100,000
Total selling and customer-‐‑service costs $360,000 $362,500

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
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2012 2013
Units of CM7 produced and sold 5,000 5,500

customers that the customer and service functions are designed to support. Ernsting Corporation has 100

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
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2012 2013
Units of CM7 produced and sold 5,000 5,500

customers that the customer and service functions are designed to support. Ernsting Corporation has 100

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
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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

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

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

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
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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

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

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

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

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
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9) It is difficult to determine unused capacity for ________.

A) direct engineered costs
C) variable costs
D) marginal costs
Answer: B
Diff: 2
Objective: 5


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

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
12) Which of the following statements is a valid argument for Argon to reduce its manufacturing
capacity?
A) Argon'ʹs 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

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13) Direct material cost is an example of ________.

A) conversion costs
C) engineered costs
D) downsized costs
Answer: C
Diff: 2
Objective: 5

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

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

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

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
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

19) Advertising cost is an example of a discretionary cost.
Answer: TRUE
Diff: 2
Objective: 5
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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

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

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

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
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

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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

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

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
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

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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

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

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
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7) Bromint Company provided the following information:


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

8) Mintol Company provided the following information:

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

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
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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 labor-‐‑
hours 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

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

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

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
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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

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
C) Quantity of output produced in current year ÷ Costs of inputs at previous year prices that would have
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

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

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
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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

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

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

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

22) Productivity describes the relationship between different quantities of inputs consumed and the
quantities of output produced.
Answer: TRUE
Diff: 1
Objective: A1
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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 2012
Remote control units produced and sold 80,000 100,000
Direct manufacture labor-‐‑hours 12,000 13,200
Direct materials used (sets) 80,600 100,500
Direct manufacture cost per hour $18 $20
Direct materials cost per set $31 $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
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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:

2011 2012
Units produced and sold 6,800 5,600
Direct materials used (tons) 29,000 24,400
Direct materials cost per ton $431 $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 = $12,499,000
Direct manufacturing labor = 136,000 × $21 = 2,856,000
Total $15,355,000

2012 Direct materials = 24,400 × $443 = $10,809,200
Direct mfg. labor = 115,200 × $22 = 2,534,400
Total $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
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25) Fairytale Weddings manufactures wedding dresses. The following information relates to the
manufacture of gowns in its Perth plant:

20X1 20X2
Units produced and sold 43,000 52,600
Direct materials used (square yards) 130,000 152,000
Direct materials cost per yard $10 $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: = $1,590,233
20X1 input with 20X2 costs: 130,000 × 52,600/43,000 × $11 = 1,749,256
Input price change $ 159,023 U

20X1 input with 20X2 costs: = $1,749,256
20X2 costs: 152,000 × $11 = 1,672,000
Productivity change $ 77,256 F

Direct manufacturing labor:
Actual 20X1 costs: 22,000 × $16 = $352,000
20X1 input for 20X2 output: 22,000 × 52,600/43,000 × $16 = 430,586
Output adjustment $ 78,586 U

20X1 input for 20X2 output: = $430,586
20X1 input with 20X2 costs: 22,000 × 52,600/43,000 × $17 = 457,498
Input price change $ 26,912 U

20X1 input with 20X2 costs: = $457,498
20X2 costs: 26,000 × $17 = 442,000
Productivity change $ 15,498 F

All inputs:
Output adjustment: $290,233 U + $78,586 U = $368,819 U
Input price change: $159,023 U + $26,912 U = $185,935 U
Productivity change: $77,256 F + $15,498 F = $ 92,754 F
Diff: 3
Objective: A1
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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'ʹs
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'ʹ 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

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
52

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Cost Accounting, 15e (Horngren/Datar/Rajan)

Answer the following questions using the information below:

Answer the following questions using the information below:

Answer the following questions using the information below:

9) It is difficult to determine unused capacity for ________.

13) Direct material cost is an example of ________.

7) Bromint Company provided the following information:

10) Answer the following questions using the information below:

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