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5 questions to evaluate a capital investmentWhich of the four methods of evaluating capital projects would you prefer to use, and why? How would the type of capital investment decision you were making affect your choice of method? | Homework.Study.comHow To Evaluate Capital Investment Projects | Pure Prime SolutionsGuide to Capital Budgeting & Its Steps | Zell EducationDidn't know it?
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Exam 3, Chapters 11, 10, 9, & 8
| Question | Answer |
|---|---|
| Capital Rationing | the process of ranking and choosing among alternative capital investments based on the availability of funds |
| Internal Rate of Return (IRR) | The rate of return, based on discounted cash flows, of a capital investment |
| Capital budgeting is the ______________ | process of planning for investments in long-term assets |
| Which two methods are typically used for initial screening of investments, rather than for detailed, in-depth analysis? | payback and accounting rate of return |
| What is the time value of money? | A dollar received today is worth more than a dollar to be received in the future |
| When comparing several investments with the same initial cost, the decision should be made on the basis of the _______ | highest NPV |
| Furniture would be an example of a long-term operational asset (T/F) | True |
| An example of a long-term operational asset is Merchandise Inventory (T/F) | False |
| The time value of money concept explains why we would rather receive cash later rather than sooner (T/F) | False |
| Sunk cost | a cost that was incurred in the past and cannot be changed regardless of future actions |
| relevant cost | a cost that is relevant to a particular decision because it is a future cost and differs between alternatives |
| relevant information | expected future data that differs among alternatives |
| irrelevant cost | a cost that does not affect the decision because it is not in the future or does not differ among alternatives |
| differential analysis | a method that looks at how operating income would differ under each decision alternative leaving out irrelevant information |
| special price order | occurs when a customer requests a one-time order at a reduced sales price |
| Costs that do not differ between alternatives are _______ | considered irrelevant to the decision |
| When replacing an old asset with a new one, the original purchase price of the old asset represents a(n) _________ cost | sunk |
| In short term decision making fixed costs and variable costs must be analyzed separately (T/F) | true |
| When should management consider dropping a business division? | The division's avoidable fixed costs are greater than its contribution margin |
| In deciding whether to drop its electronics product line, a company's manager should ignore _______ | the amount of unavoidable fixed costs |
| When considering whether to replace the building roof, the total amount paid for previous roof repairs is relevant to the business decision (T/F) | False |
| Price-setters emphasize a target-pricing approach while price-takers emphasize a cost-plus pricing approach (T/F) | False |
| centralized company | A company in which major planning, directing, and controlling decisions are made by top executives |
| decentralized company | a company that is divided into business segments, with segment managers making, planning, directing, and controlling decisions for their segments |
| A cost center management is responsible for ______ | controlling costs |
| A revenue center manager is responsible for ___________ | generating revenues |
| A profit center manager is responsible for _______________ and _____________ | generating revenues, controlling costs (profit) |
| An investment center manager is responsible for __________ and __________ | generating profits, efficiently managing the center's invested capital |
| performance evaluation system | a system that provides top management with a framework for maintaining control over the entire organization |
| lag indicator | a performance measure that indicates past performance (after the fact) |
| lead indicator | a performance measure that forecasts future performance (future predictions) |
| balanced score card | the performance evaluation system that requires management to consider both financial performance measures and operational performance measures when judging the performance of a company and its subunits |
| key performance indicator (KPI) | a summary performance measure that helps managers assess whether the company is achieving its goals |
| ______________ are performance reports that capture the financial performance of cost, revenue, and profit centers with a focus on responsibility and control | responsibility reports |
| _________________ is a cost that a manager has the power to influence by his or her decisions | controllable cost |
| cost center responsibility reports typically focus on the _____________, the difference between actual results and the flexible results | flexible budget variance |
| revenue center responsibility reports highlight both the ______________ and the ____________ | flexible budget variance, sales volume variance |
| transfer price | The transaction amount of one unit of goods when the transaction occurs between divisions within the same company |
| the transfer price should be an amount between the __________ and the ________ | market price, variable cost |
| The gift shop at the local zoo is a(n) _________ | profit center |
| The menswear department of a department store, which is responsible for buying and selling merchandise is a(n) _______ | profit center |
| A _____________ is any segment of the business whose manager is accountable for specific activities | responsibility center |
| The sales manager in charge of a shoe company responsible for a particular brand of soft drink is a(n) ____________ | revenue center |
| What is a disadvantage of decentralization? | certain costs might be duplicated |
| The level of employee satisfaction is a key performance indicator of the ________ perspective of a balanced scorecard. | learning and growth |
| What is a key performance indicator of the internal business perspective of the balance scorecard? | number of units produced per hour |
| What perspective of the balanced scorecard focuses on the increase of company profits through increasing revenue growth and productivity? | financial |
| In decentralized companies, performance evaluation systems provide upper management with the feedback it needs to maintain control over the entire organization (T/F) | True |
| flexible budget | a budget prepared for various levels of sales volume |
| flexible budget variance | The difference between actual results and the expected results in the flexible budget for the actual units sold |
| sales volume variance | the difference between the expected results in the flexible budget for the actual units sold and the static budget |
| static budget variance | the difference between actual results and the expected results in the static budget |
| budget performance report | a report that summarizes the actual results, budgeted amounts, and the differences |
| static budget | a budget prepared for only one level of sales volume |
| Setting standards required ________ and ________ among different divisions and functions | coordination, communication |
| management by exception | managers concentrate on results that are outside the accepted parameters |
| Which division manager is responsible for when workers were paid more than expected? | HR manager |
| Which division manager is responsible for when material purchases were at a higher cost than standards? | Purchasing department |
| Which division manager is responsible when inexperience workers caused a delay in unit production? | Production manager |
| What does the time value of money NOT depend on? | expected cash flows |
| What is the most reliable method for making capital budgeting decisions? | NPV method |
| Which part of the capital budgeting process identifies and analyzes capital investments? | plan |
| Managers usually use the __________ method as a screening device to eliminate investments that will take too long to recoup the initial investment. | payback |
| The comparison of the actual results of capital investments to the project results is referred to as __________ | post-audit |
| What is not a popular method for analyzing potential capital investments? | capital budgeting |
| In many cases, the transfer price __________. | does not affect the overall company profits |
| The primary objective in setting transfer prices is to ______________ | achieve goal congruence by selecting a price that will maximize overall company profits |
| A(n) _________ variance measures how well the business uses its materials or human resources | efficiency |
| If a Manufacturing Overhead is the debt journal entry, the credit entry would be to _____________ | variable overhead cost variance |
| When journalizing for an unfavorable direct materials cost variance _________ | direct materials cost variance is debited |
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