Chapter 7 Notes
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This 4 page Class Notes was uploaded by Caroline Fritze on Sunday October 11, 2015. The Class Notes belongs to ACCT 202 at Clemson University taught by Kyle Anderson in Summer 2015. Since its upload, it has received 17 views. For similar materials see Managerial Accounting in Accounting at Clemson University.
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Date Created: 10/11/15
Chapter 7 Differential Analysis and Decisions 101115 433 PM Relevant costs costs that differ between alternatives Relevant benefits benefits that differ between alternatives Avoidable costs can be eliminated by choosing one alternative over another Sunk costs costs that have already been incurred and cannot be avoided regardless of what a manager decides to do Why isolate relevant costs 0 There will rarely be enough information available to prepare a detailed income statement for both alternatives Mingling irrelevant costs with relevant costs may cause confusion and distract attention from critical information 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 Value chain the major business functions that add value to a company s products and services Ex research and development product design manufacturing marketing distribution and customer service When a company is involved in more than one activity in the entire value chain it is vertically integrated 0 Advantages less dependent on its suppliers 0 May be able to ensure a smoother flow of parts and materials for production than a nonintegrated company Make or buy decision a decision to carry out one of the activities in the value chain internally rather than to buy externally from a supplier Special order a onetime order that is not considered part of the company s normal ongoing business Constraint when a limited resource of some type restricts the company s ability to satisfy demand 0 Managers have to decide which products or services make the best used of the constrained resource 0 Fixed costs are usually unaffected by such choices so the choice that maximizes the total contribution margin should be picked Bottleneck the machine or process that is limiting overall output 0 Managers can increase profits by increasing the capacity of the bottleneck operation Relaxing or elevating the constraint when a manager increases the capacity of the bottleneck 0 Ex working overtime on the bottleneck investing in additional machines focusing business process improvement efforts on the bottleneck Joint products two or more products that are produced from a common input Splitoff point point in the manufacturing process at which the joint products can be recognized as separate products Joint cost the costs incurred up to the splitoff point Irrelevant in decisions regarding what to do with a product from the splitoff point forward Sell or process further decisions deciding whether a joint product should be sold at the splitoff point or sold after further processing 0 Profitable to continue processing so long as the incremental revenue from the processing exceeds the incremental processing cost incurred after the splitoff point 101115 433 PM 101115 433 PM