1. Define the term \"opportunity cost.\" How may this cost be relevant in a make
ID: 2383773 • Letter: 1
Question
1. Define the term "opportunity cost." How may this cost be relevant in a make-or-buy decision?2. A variation on cost-plus pricing is time-and-material pricing. Under this approach, two pricing rates are set. Explain where this approach is used and identify the steps involved in time-and-material pricing. Also explain what the material loading charge covers and how it is expressed.
3. What is participative budgeting? What are its potential benefits? What are its potential shortcomings?
4. What is responsibility accounting? Explain the purpose of responsibility accounting.
Explanation / Answer
1. Opportunity cost is the potential benefit that may be obtained by following an alternative course of action.This opportunity cost therefore is added to the make column , for comparison. This is very helpful for comparison to make or buy decision. 2. When the company sets the price, price is commonly a function of the cost of the product or service. That is, the typical approach is to use cost-plus pricing. This approach involves establishingk a cost base and adding to this cost base a markup to determine a target selling price. This is the selling price that will provide the desired profit when the seller has the ability to determine the product's price, Time-and - Material Pricing: Another variation on cost-plus pricing is called the time and material pricing. Under this aproach, the company sets two pricing rates - one for labor used on a job and another for the material. The labor rate includes direct labor time and other employee costs. The material charge is based on the cost of direct parts and matrials used and a material loading charge for related overhead costs.Time-and-material pricing is widely used in service industries, especially professional firms such as public accounting, law, engineering, and consulting firms, as well as construction companies, repair shops, and printers. Material loading charge:The charge for materials typically includes the invoice price of any materials used on the job plus a material loading charge. The material loading charge covers the costs of purchasing, receiving, handling, and storing materials, plus any desired profit margin on the materials themselves. The material loading charge is expressed as a percentage of the total estimated costs of parts and materials for the year. 3. Participative Budgeting: In developing the budget, each level of management should be invited to participate. This "bottom -to-top" appraoch is referred to as participative budgeting. The advantage of participative budgeting are forst, that lower-level managers have more detailed knowledge of ther specific area and thuls are able to provide more accurate budgetary estimates.Second, when lower-level managers participate in the budgeting process, they are more likely to erceive the resulting budget as fair.The overall goal is to reach agreement on a budget that the managers consider fair and achievable, lbut which also meets the corporate goals set by top management. Disadvantages: It is more time-consuming than a top-down approach, in which the budget is simply dictated to lower-level managers. Participative budgeting can foster budgetary 'gaming' through budgetary slack. 4.Like budgeting, responsibility accounting is an important part of management accounting. Responsibility accounting involves accumulating and reporting costs oin the basis of the manager who has the authority to make the day-to-day decisions about the items. under responsibility accounting, a manager's performance is evaluated on matters directly under that manger's control. Responsibility accounting can be used at every level of management in which the following conditons exist. 1. Costs and revenues can be directly associated with the specific level lof management responsibility. 2. The costs and revenues can be controlled by employees at the level of responsibility with which they are associated. 3. Budget data can be developed for evaluating the manager's effectiveness in controlling the costs and revenues.Related Questions
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