Managerial Accounting ACCT 2301
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This 39 page Class Notes was uploaded by Morris Beer II on Thursday October 22, 2015. The Class Notes belongs to ACCT 2301 at Texas Tech University taught by Bigbee in Fall. Since its upload, it has received 43 views. For similar materials see /class/226438/acct-2301-texas-tech-university in Accounting at Texas Tech University.
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Date Created: 10/22/15
Davis Driveways Inc Cost Plus Pricing Policy Materials 100 Labor 120 Overhead 80 Total 300 Desired Profit 50 Price 350 Annual overhead cost for rent on the corporate office and supervisory salaries is 80000 Normal volume is 1000 driveways per year Overhead cost per unit is determined as 80000 I 1000 units 80 per unit The relevant range is from 800 to 1500 units A new builder offers to purchase 200 driveways from DDI She is only willing to pay 250 per driveway Should DDI accept this offer Chapter 4 Relevant Information for Special Decisions Relevant Information Two primary characteristics distinguish relevant from useless information 1 Relevant information d ers among the alternatives under consideration 2 Relevant information is future oriented Sunk Cost A sunk cost has been incurred in the a past transaction and cannot be changed they are not relevant for making current decisions Wish I hadn t bought that stock Cost me 25000 and now its worth only 15000 I really need a car but don t J st sell the stock and u have the cash buy the car Sunk Cost A sunk cost has been incurred in the a past transaction and cannot be changed they are not relevant for making current decisions You ve already taken the loss The 25000 is a sunk cost Like I said sell I don t want to take the the stock and buy the car you need Relevant Information 25000 stock cost is irrelevant Why Because it is a sunk cost The 25000 is not future oriented Question to ask is if you had 15000 today would you buy stock or a car Answer a car Need to sell the stock and buy the car Relevant Differential Revenues Relevant revenues must 1 be future oriented and 2 differ for the alternatives under consideration Since relevant revenues differ between the alternative they are sometimes called differential revenues Relevant Avoidable Costs Unitlevel Activities Avoided by eliminating one unit of product eieiiaie vei Aetiviiiee Productlevel Aveided when eff wei k ie Avoided if a product line Activities Feeiiiiyaievei is eliminated Wi ii a emaieei iine ie eiimineied Relevance Is an Independent Concept Management at Better Bakery Products are debating whether to add a new product either cakes or pies to the company s product line Project costs are shown Cost of Cakes Cost of Pies Materials per unit 150 Materials per unit 200 Direct labor per unit 100 Direct labor per unit 100 Supervisor39s salary 2500000 Supervisor39s salary 2500000 Franchise fee 5000000 Advertising 4000000 Under either alternative a new production supervisor must be hired as a cost of 25000 per year Cakes are distributed under a nationally advertised label Pies are marketed under the company s own name and will required new advertising Relevance Is an Independent Concept Which costs are relevant Cost of Cakes Cost of Pies Materials per unit 150 Materials per unit 200 Direct labor per unit 100 Direct labor per unit 100 Supervisor39s salary 2500000 Supervisor39s salary 2500000 Franchise fee 5000000 Advertising 4000000 Fifty cents can be avoided by choosing cakes instead of pies Labor costs do not differ The supervisor s salary is not relevant because it does not differ The advertising costs can be avoided if the company elects to make cakes Whether a cost is xed or variable has no bearing on it relevance Relevancy of Opportunity Costs The sacrifice represented by a lost opportunity is an opportunity cost Opportunity costs that are 1 future oriented and 2 differ between the alternatives are relevant for decision making but are extremely difficult to measure Let s look at an example Opportunity Cost You purchased a ticket to the Tech vs Texas football game for 200 Outside the game someone offers you 500 for the ticket You really want to go to the game and don t sell your ticket How much did it cost you to go to the game 500 is your opportunity cost 200 is your sunk cost Example Brown Manufacturing Company is currently using a building as a manufacturing facility Depreciation on the building is 200000 per year The building is in a location that is experiencing significant growth in retail shopping A retail company has offered to rent the manufacturing facility from BMC at a price of 180000 per year What information is relevant in deciding whether to move the manufacturing facility to a different location Cost Classification Hierarchy Unitlevel Costs Incurred each time a company generates one unit of product Example Direct materials amp direct labor costs Batchlevel Costs Costs incurred for a batch of products Example Setup and inspection costs Productlevel Costs Costs incurred to create sustain or sell a product or product line Example Engineering costs for new automobile model Facilitylevel Costs Incurred to support the entire company Example Factory depreciation maintenance utilities Four Wpes 06 special Decisions Special Order Outsourcing Segment Elimination Asset Replacement Relevant Information and Special Decisions Occasionally a company receives an offer to sell its product at a price significantly below its normal selling price The company must make a special order decision to accept or reject the offer Budgeted Cost for Expected Production of 2000 Printers Unitlevel costs Materials costs 2000 x 90 Labor costs 2000 x 8250 Overhead 2000 x 750 Total unitlevel costs Batchlevel costs Assembly setup 10 x 1700 Materials handling 10 x 500 Total batchlevel costs Productlevel costs Engineering design Production manager39s salary Total productlevel costs Facilitylevel costs Segementlevel costs Division manager39s salary Company preside nt39s salary Depreciation General expenses Total facilitylevel costs Total expected costs 180000 165000 15000 17000 5000 14000 63300 85000 12700 43200 27300 31000 360000 22000 77300 199200 658500 Here is budgeted cost information for Premier a company that produces printers The company has enough capacity to produce additional printers but is planning to produce to meet current demand Cost per unit 658500 2000 32925 Special Order Decision A foreign customer offers to purchase 200 printers at 250 per printer This price is well below the unit cost of 32925 Should the company accept this one time order Relevant Information for Special Order Differential revenue 250 x200 50000 Avoidable unitlevel costs 180 x 200 36000 Avoidable batchlevel costs Assembly setup 1700 Materials handling 500 Contribution to income 11800 If the order is accepted income will increase by 11800 Special Order Decision If Premier can increase income by selling its printer for 250 can the company reduce its normal selling price to 250 Selling 2200 Printers for 250 Per Unit Revenue 250 x 2200 550000 Unitlevel costs 180 x 2200 396000 Batchlevel costs 11 x 2200 24200 Productionlevel costs 77300 Facilitylevel costs 199200 Total cost 696700 Projected loss 146700 Special Order DeGiSion Quantitative Aspect 1 Determine the amount of revenue the company will earn if it accepts the special order 2 Determine the relevant costs of making the additional units 3 Compare the incremental revenues to the additional costs What costs must be considered Unitlevel costs Relevant bc cost will differ if the company makes and sells the units vs rejecting the special order Batchlevel costs May or may not be relevant Relevant if must produce a separate batch to fill the order Productlevel and Facilitylevel costs remain unchanged Not Relevant Outsourcing Decisions Companies can sometimes purchase products needed in the manufacturing process for less than it would cost to make them Buying goods and services from other companies rather than producing them internally is commonly called outsourcing That test was so easy 1 outsourced my How did you score so homeworku low Outsourcing Decisions Let s return to our Premier example Recall that the unit cost per printer was 32925 A supplier offers to sell an unlimited number of printers to Premier for 240 each Should Premier accept this outsourcing offer Step 1 Determine the production costs Premier can avoid if it elects to outsource printer production Relevent Costs for 2000 Printers Unitlevel costs 180 x 2000 360000 Batchlevel costs 10 x 2200 22000 Productlevel costs 77300 Total relevant cost 459300 Cost per unit 459300 2000 22965 Outsourcing Decisions Step 2 Compare the avoidable production costs with the cost of buying the product and select the lowercost option COST TO BUY 240 2200 528000 COST TO MAKE 459300 Premier should reject the outsourcing offer Outsourcing Decisions Must identify the relevant costs of making a product internally and compare with cost to buy the product from an outside supplier Make or buy decision Relevant Costs Unitlevel costs Batchlevel costs Productlevel costs Facilitylevel costs Not relevant Segment Elimination Decisions Businesses are frequently organized into operating units known as segments Segment reports can be prepared for products services departments branches centers offices or divisions These reports normally show segment revenues and costs Let s look at an a segment report for Premier Office Products that has divided its operations into three segments 1 copiers 2 computers and 3 printers it Vll Wlj g 5 Aquot m Projected revenue 550000 850000 780000 2180000 Projected costs Unitlevel costs Mate rials costs 120000 178000 180000 478 000 Labor costs 160000 202000 165000 527000 Overhead 30800 20000 15000 65800 Batchlevel costs Assembly setup 15000 26000 17000 58000 Materials handling 6000 8000 5000 19000 Productlevel costs Engineering costs 10000 12000 14000 36000 Production manager salary 52000 55800 63300 171100 Facilitylevel costs Segment level Division manager salary 82000 92000 85000 259000 Administrative costs 12200 13200 12700 38100 Allocatedcorporate level Company president salary 34000 46000 43200 123200 Building rental 19250 29750 27300 76300 General expenses 31000 31000 31000 93000 Projected profit loss 22250 136250 121500 235500 Should management eliminate the Copier segment Segment Elimination Decisions A three part decision Determine the amount of relevant revenue that pertains to eliminating the segment Determine the amount of cost that can be avoided if the segment is eliminated If the relevant revenue is less than the avoidable cost eliminate the segment If not continue to operate it Segment Elimination Decisions 11 11f wiii i ga m 55 g f Whilw mmng igm w g 111 ni nw mnm Wi i m Sima imme Segment Elimination Decisions Step 2 If Premier eliminates copiers it will avoid the following costs Unitlevel costs Materials costs 120000 Labor costs 160000 Overhead 30800 Batchlevel costs Assembly setup 15000 Materials handlin 6000 Productlevel costs Enineerin costs 10000 Production manaer salary 52000 Facilitylevel costs Sement level Division manaer salary 82000 Administrative costs 12200 Total relevant costs 488000 Segment Elimination Decisions Step 2 If Premier eliminates copiers its profits will decrease Revenue lost 550000 Costs avoided 488000 Decrease in profit 62000 The corporatelevel facilitysustaining costs will not be eliminated but will be allocated to the remaining segments Assuming we eliminate the copier segment and allocate the corporatelevel costs to the remaining two divisions equally the company s income statement will look like this m Projected revenue 850000 780000 1630000 Projected costs Unitlevel costs Mate rials costs 178000 180000 Labor costs 39 39 39 358000 Ove rhead Batchjeve co Profits before elimination 235500 Assemb39y 9 Profits after elimination 173500 Productlevelc Decrease in profit 62000 Engineering r Production manager salary 55800 63300 119100 Facilitylevel costs Segment level Division manager salary 92000 85000 177000 Administrative costs 13200 12700 25900 Allocatedcorporate level Company president salary 63000 60200 123200 Building rental 39375 36925 76300 General expenses 46500 46500 93000 Projected pro t loss 94125 79375 173500 Segment Elimination Decisions Identify relevant costs of operating a business segment and compare with cost to revenue generated by the segment Choice Closedown or Continue Segment Relevant Costs Unitlevel costs Batchlevel costs Productlevel costs Facilitylevel costs Some Corporatelevel facility costs may not be relevant Relationships Between Avoidable Costs and Business Activity 1 Special order decisions affect unitlevel and possibly batchlevel costs 2 Outsourcing can avoid many productlevel as well as unit and batchlevel costs 3 Segment elimination can avoid some of the facility level costs The more complex the decision level the more opportunities there are to avoid costs Equipment Replacement Decision The equipment replacement decision should be based on profitability rather than physical deterioration Consider the following Old Machine Original cost 90000 Accumulated depreciation 133000 Book value 57000 Market value now 14000 Salvage value in 5 years 2000 Annual depreciation expenses 11000 Operating expenses 9000 at 5 years 45000 New Machine Cost 29000 Salvage value in 5 years 4000 Operating expenses 4500 at 5 years 22500 Equipment Replacement Decision The original cost current book value accumulated depreciation and annual depreciation expense are measures of cost of the old machine relating to prior periods They are irrelevant because they are sunk costs The 14000 market value of the old machine is an opportunity cost and is relevant to the replacement decision it The salvage value of the old machine reduces the opportunity cost The opportunity cost of using the old machine for five more years is 12000 14000 2000 The 45000 operating expenses of using the old machine can be avoided if it is replaced to it is a relevant cost Equipment Replacement Decision L Wheeftdhenewmeehineeen by 0th they ee e tent 2t ht e wee new meehine tie 2530 3mm tg g 3t We 35221 e een be empemeee ewe eeeten Let s summarize the relevant costs for the two machines Equipment Replacement Decision Opportunity cost 14000 Salvage value 2000 Our analySIs ShOUId that Operating expenses 45000 Premier should acquire Tota39 m the new machine Over a five ear eriod the New Machine y p St 9 COTEal ny39g 33B Salvage value 4000 O a 0 Operating expenses 22500 57000 471500 Total 47500 Asset Replacement Decisions Identify relevant costs of operating existing assets and compare with costs of operating new replacement assets Company should chose the lowest cost op on