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ACCT 2102, Week 9 Notes

by: Randi

ACCT 2102, Week 9 Notes ACCT 2102

Marketplace > University of Georgia > Accounting > ACCT 2102 > ACCT 2102 Week 9 Notes
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About this Document

These notes cover most of chapter 8
Principles of Accounting II
Class Notes
pricetaker, pricesetter, decisions, targetcosting, specialorder, shortterm, relevantcosts
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This 4 page Class Notes was uploaded by Randi on Sunday October 16, 2016. The Class Notes belongs to ACCT 2102 at University of Georgia taught by Farmer in Fall 2016. Since its upload, it has received 3 views. For similar materials see Principles of Accounting II in Accounting at University of Georgia.


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Date Created: 10/16/16
Week  9  Notes   ACCT 2102 PROF.  FARMER   Chapter  7:  Cost-­‐Volume-­‐Profit  Analysis  continued     • Sales  Mix   o The  relative  mix  of  product  sold   o Similar  to  a  ratio     Chapter  8:  Relevant  Costs  for  Short-­‐Term  Decisions     • Short-­‐term  Business  Decisions   • Rules  of  thumb:   1. Identify  and  focus  on  relevant  information   • Relevant  information  must  differ  between  alternatives     • It  must  be  future  oriented   2. Consider  Qualitative  factors   • Decisions  involve  not  just  quantitative,  but  qualitative  factors.     3. Analyze  variable  costs  and  fixed  costs  separately  using  a  contribution   margin  approach   • Be  careful  about  unit  cost  data,  unless  it  is  purely  a  variable  cost   per  unit   • A  MC  or  a  FC  in  unit  could  potentially  change!   • It  is  okay  for  VC  to  be  in  units             • Sunk  costs   o Things  that  happen  in  the  past  that  should  not  affect  future  decisions       Week  9  Notes   1. Special  Order  Decisions   • One  time,  large  volume  orders  at  a  reduced  price     • Do  we  have  excess  capacity  available  to  fill  this  order?   Full  Capacity  –  Current  Operations  =  Excess  Capacity     • What  do  I  get  if  I  accept?  What  do  I  give  up?     • Will  the  reduced  sales  price  be  high  enough  to  cover  the  incremental  costs  of   filling  the  order  (the  variable  costs  of  filling  the  order  and  any  additional   fixed  costs)?   [(Special  SP  –  Special  Unit  VC)  X  (Number  or  Units  in  Special  Order)]  –  FC   *additional  FC  may  be  added  in  the  problem     • Will  the  special  order  affect  regular  sales  in  the  long  run?   o You  only  give  up  regular  sales  if  you  don’t  have  sufficient  excess   capacity   In  the  Short  Run:  (Regular  Unit  Sales)  X  (Regular  Unit  CM)     In  the  Long  Run:     -­‐The  special  order  could  set  a  bad  precedent…  regular  customers  may  expect   to  get  the  discounted  price  as  well  or  get  angry  and  stop  buying  from  you.   -­‐  It  is  hard  to  quantity  how  the  short-­‐term  decision  will  affect  the  long  run   because  we  don’t  always  know  hoe  people  will  react       Week  9  Notes   2. Pricing  Decisions     • How  much  should  we  charge?   • 3  players  in  Pricing  decisions:   1. Owners  (Shareholders)   2. Customers  (Market)   3. Company   *The  needs  and  wants  of  all  three  parties  must  be  balanced       • What  is  our  target  profit?     o Look  to  shareholders  to  get  the  OPY     • How  much  will  customers  pay?   o Look  to  the  market  to  get  SP     • Are  we  a  price-­‐taker  or  price-­‐setter  for  this  product?   o Price-­‐Taker     § Price-­‐Takers  are  usually  generic  brands  that  do  not  have   control  over  their  prices   § They  can  only  control  VC  and  FC   § How  can  we  gain  control  over  pricing?   • Usually  have  to  spend  more  money  in  order  to  gain   brand  recognition   § They  use  TARGET  COSTING       o Price-­‐Setter   § How  do  we  gain  control  over  pricing?   § Focused  on  SR…  not  VC  or  FC         Week  9  Notes   3. Decisions  to  Discontinue  Products,  Departments,  or  Stores   (all  of  these  can  be  referred  to  as  segments)     • Does  the  segment  provide  a  positive  contribution  margin?   SR  –  VC   • Are  there  any  fixed  costs  that  can  be  avoided  if  we  discontinue  the  segment?   o Fixed  Costs  can  be  split  up  into:   1. Traceable  FC   • Should  be  used  when  evaluating  the  profitability  of  a   segment   2. Common  FC   • Theses  costs  will  still  be  there,  even  if  a  segment  goes   away  (example:  A  CEO’s  salary)     • Common  FC  should  not  be  used  to  evaluate  a  segment     • Will  discontinuing  the  segment  affect  sales  of  the  company’s  other  products?   o Maybe!     • What  could  we  do  with  the  freed  capacity?   o What  can  we  do  with  what  we  have  left?         SR                (VC)   (Traceable  FC)   Segment  Margin  (SM)     ^The  sum  of  all  SM,  minus  the  total  common  FC  gives  us  OPY                


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