ACC 202 Chapter 12
ACC 202 Chapter 12 ACC 202
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This 3 page Class Notes was uploaded by Marissa Sarlls on Sunday January 10, 2016. The Class Notes belongs to ACC 202 at University of Kentucky taught by Jana Wilhelm in Spring 2016. Since its upload, it has received 32 views. For similar materials see Managerial Accounting (202, Wilhelm) in Accounting at University of Kentucky.
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Date Created: 01/10/16
Chapter 12 Differential Analysis: The Key to Decision Making Differential Analysis It is focusing on the costs and benefits that differ between the alternatives Relevant cost—a difference in cost between any two alternatives o AKA avoidable cost, differential cost, an incremental cost Relevant benefit—a benefit that differs between alternatives in a decision o Differential revenue (difference in revenue between any two alternatives) is a relevant benefit Cost Concepts for Decision Making Avoidable cost—a cost that can be eliminated by choosing one alternative over another in a decision. o Synonymous with differential cost and relevant cost o Unavoidable costs (like the rent on your apartment) are irrelevant Sunk cost—any cost that has already been incurred and that cannot be changed by any decision made now or in the future. So, irrelevant to decision making o Depreciation is a sunk cost o Future costs that will make no difference in the decision are also sunk costs Opportunity cost—The potential benefit that is given up when one alternative is selected over another o The cost is the job that you don’t take “Different costs for different purposes” Adding and Dropping Product Lines and Other Segments Depends on the impact it would have on NOI Beware of allocated fixed costs one of the great dangers of allocating common fixed costs is that such allocations can make a product line look less profitable than it actually is. o Dropping it might decrease NOI Managers may choose to retain an unprofitable product line if the line helps sell other products, or if it serves as a “magnet” to attract customers To Make or Buy Decision Value chain includes all of the steps necessary to develop and sell a product, including development, production, and after-sales service Vertical integration—the involvement by a company in more than one of the activities in the entire value chain from development through production, distribution, sales, & after-sales service; more than 1 activity Make or buy decision—a decision concerning whether an item should be produced internally or purchased from an outside employer Advantages of VI: o An integrated company is less dependent on its suppliers and may be able to ensure a smoother flow of parts and materials for production o Can control quality better o Realizes profits from the parts and materials that it is “making” rather than “buying”, as well as profits from its regular operations Advantages of buying: o By pooling demand from a number of companies, a supplier may be able to enjoy economies of scale…high supply, low demand Opportunity Cost Sometimes it is cheaper to make instead of buy but it is also important to consider the opportunity cost of the space now being used to produce the product, which would otherwise be idle & used for something else If they choose to use that space to make something else, then the space would have an opportunity cost equal to the segment margin that could be derived from the best alternative use of the space Opportunity costs are not recorded in the organization’s ledger because they represent economic benefits that are forgone as a result of pursuing some course of action Special Orders Special order—a one-time order that is not considered part of the company’s normal ongoing business o Only incremental costs and benefits are relevant o A special order is profitable if the incremental revenue from the special order exceeds the incremental costs of the order Utilization of a Constrained Resource Constraint—A limitation under which a company must operate, such as limited available machine time or raw materials, that restricts the company’s ability to satisfy demand; anything that prevents you from getting more of what you want o Bottleneck—a machine or some part of a process that limits the total output of the entire system o The constraint, or bottleneck, in the system is determined by the step that limits total output because it has the smallest capacity. To strengthen constraint: o Identify weakest link o Do not place greater strain on the system than the weakest link can handle o Concentrate improvement efforts on strengthening the weakest link o If the improvement efforts are successful, eventually the weakest link will prove to the point where it is no longer the weakest link Favor products that provide the highest contribution margin per unit of constrained resource amountof constrainedresourcerequire o CM perunit CM perunitof constrained resource= ¿ makeunitof product ¿ Managing constraints o Relaxing (or elevating) the constraint—an action that increases the amount of a constrained resource. Equivalently, an action that increases the capacity of the bottleneck Problem of multiple constraints o The proper combination or “mix” of products can be found by the use of a quantitative method known as linear programming Joint Product Costs Joint products—Two or more products that are produced from a common output Split-off point—that point in the manufacturing process where some or all of the joint products can be recognized as individual products Joint cost—costs that are incurred up to the split-off point in a process that produces joint products o They are common costs that are incurred to simultaneously produce a variety of end products and are allocated among the different products at the split-off point according to the relative sales value of the end products Sell or Process Further o Joint costs are irrelevant in decisions regarding what to do with a product from the split-off point forward. o Sell or process further decisions—A decision as to whether a joint product should be sold at the split-off point or sold after further processing o It is profitable to continue processing a joint product after the split-off point so long as the incremental revenue from such processing exceeds the incremental processing cost incurred after the split-off point Activity-Based Costing and Relevant Costs Activity-based costing improves the traceability of costs by focusing on the activities caused by a product or the other segment
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