ACCTBA3 FINALS REVIEWER
I. CHAPTER 1: MANAGERIAL ACCOUNTING AND
THE BUSINESS ENVIRONMENT
Globalization
The marketplace is becoming increasingly global
o
Reductions in barriers to free trade (tariffs,
quotas, etc)
o
Improvements in global transportation
o
Expansion of the Internet
o
Increasing sophistication in international
markets
Effects of globalization
o
Greater and wider competition
o
Greater access to new markets, customers and
workers
o
More variety of goods and services for
consumers
The Internet and globalization
o
The internet provides companies with greater
access to geographically dispersed customers,
employees and suppliers
However, 78% of the population was
still not connected to the Internet.
Strategy
A “game plan” that enables a company to attract
customers by distinguishing itself from competitors
Customer Value Propositions
o
Customer Intimacy
Understand and respond to individual
customer needs
o
Operational Excellence Strategy
Deliver products and services faster,
more conveniently, and at lower prices
o
Product Leadership Strategy
Offer higher quality products
Organizational Structure
Decentralization
o
Delegation of decision-making authority
throughout an organization
Can be done by giving managers the
authority to make decisions relating to
their area of responsibility
Corporate Organization Chart
o
Shows how responsibility is divided (chain of
command)
o
Depicts the line and staff positions in an
organization
Line positions: directly related to the
achievement of the basic objectives of
an organization
Example:
production
supervisors
in
a
manufacturing plant
Staff positions: support and assist line
positions
Example: cost accountants in
the manufacturing plant
o
Chief Financial Officer
Provides timely and relevant data to
support planning and controlling
activities
Prepares financial statements for
external users
Process Management
Business Process
o
A series of steps that are followed in order to
carry out some task in a business
Value Chain
o
Consists of the major business functions that
add value to a company’s products and services
Business functions making up the value chain
R
and
D
Product
Design
Manufacturi
ng
Market
ing
Distributi
on
Custo
mer
Service
Three approaches to improving business processes
o
Lean Production
o
Theory of Constraints
o
Six Sigma
Traditional “push” manufacturing company
Lean Production
o
Lean thinking model
Five-step management approach
Results in a “pull” manufacturing
system that reduces inventories and
wasted effort, decreases defects, and
shortens customer response times
Board of DirectorsPresident
Puchasing Personnel Vice President Operations Chief Financial Officer Treasurer Controller
Forecast sales
Order components
Store inventory Produce goods in anticipation of sales Store inventory Make sales from
finished goods inventoy 1. Identify value in specific products/services 2. Identify business process that delivers
value 3. Organize work arangements 4. Create a pull system 5. Continuously pursue perfection in business process
o
Lean thinking can be used to improve business
processes that link companies together
o
Supply Chain Management
Coordination of business processes
across companies to better serve end
consumers
Theory of Constraints
o
Based on the observation that effectively
managing the constraint is the key to success
Constraint (bottleneck): anything that
prevents you from getting more of
what you want.
Determined by the step that has the
smallest capacity
Six Sigma
o
Relies on customer feedback and fact-based data
gathering and analysis techniques to drive
process improvement
o
Refers to a process that generates no more than
3.4 defects per million opportunities
o
Sometimes associated with the term zero defects.
o
DMAIC Framework
Stage
Goals
Define
Establish scope and purpose
Diagram the flow
Establish customer’s requirements
Measure
Gather baseline performance data
Narrow the scope of the project to the most
important problems
Analyze
Identify root cause(s) of the problems
Improve
Develop, evaluate and implement solutions
Control
Ensure problems remain fixed
Seek to improve the new methods over time
IMA’s Code of Conduct for Management Accountants
IMA Guidelines for Ethical Behavior
o
Competence
Recognize
and
communicate
professional limitations
Follow applicable laws
Provide accurate, clear, concise, and
timely decision support information
o
Confidentiality
Do not disclose (and ensure
subordinates
do
not
disclose)
confidential information unless legally
obligated
Do not use confidential information
for unethical or illegal advantage
o
Integrity
Mitigate conflicts of interest and advise
others of potential conflicts
Abstain from activities that might
discredit the profession
Refrain from conduct that would
prejudice carrying out duties ethically
o
Credibility
Communicate information fairly
Disclose delays or deficiencies
Disclose all relevant information that
could influence a user’s understanding
of reports and recommendations
IMA Guidelines for Resolution of an Ethical Conflict
o
Follow employer’s established policies
o
For an unresolved ethical conflict:
Discuss conflict with immediate
supervisor or next highest uninvolved
manager
If immediate is CEO,
consider BoD or the audit
committee
Contact with levels above the
immediate supervisor should only be
done with the supervisor’s knowledge
Except where legally prescribed,
maintain confidentiality
Clarify issues in a confidential
discussion with an objective advisor
Consult an attorney as to legal
obligations
Why have ethical standards?
o
These are essential for a smooth functioning
economy
o
Without ethical standards will lead to a lower
quality of life with less desirable goods and
services at higher prices
Corporate Governance
The system by which a company is directed and
controlled
Boards of directors provide incentives and monitoring
for top management to pursue objectives of
stockholders.
Enterprise Risk Management
Process used by a company to proactively identify and
manage risk
Once a company identifies its risks, specific controls may
be implemented to reduce these risks
Corporate Social Responsibility
Customer places an order Create production order Generate component requirements Components are ordered Production begins as parts arrive Goods delivered when needed 1. Identify the weakest link 2. Allow the weakest link to setthe tempo 3. Focus on
improving the weakest link 4. Recognize that
the weakest link is no longer so
Concept whereby organizations consider the needs of all
stakeholders when making decisions
Extends beyond legal compliance to include voluntary
actions that satisfy stakeholder expectations
II. CHAPTER 2: MANAGERIAL ACCOUNTING AND
COST CONCEPTS
Work of Management
Planning
Directing and Motivating
o
Involves managing day-to-day activities to keep
the organization running smoothly
Controlling
o
Ensuring that plans are being followed
o
Feedback in the form of performance reports
that compare actual results with the budget are
an essential part of the control function
Planning and Control Cycle
Comparison of Financial and Managerial Accounting
Financial
Managerial
Users
External persons who
make financial
decisions
Managers who plan for
and control an
organization
Time focus
Historical perspective
Future emphasis
Verifiability
vs. relevance
Verifiability
Relevance for planning
and control
Precision vs.
timeliness
Precision
Timeliness
Subject
Focus is on the whole
organization
Focuses on segments of
an organization
GAAP
Required
Not required
Requirement Mandatory for external
reports
Optional
Manufacturing Costs (PRODUCT COSTS)
Direct Materials (Direct Cost)
o
Raw materials that can be conveniently traced
directly to the finished product
Direct Labor (Direct Cost)
o
Labor costs that can be easily traced to
individual units of product
Manufacturing Overhead (Indirect Cost)
o
Cannot be traced directly to the specific units
produced (indirect materials and indirect labor;
support)
Prime Cost = Direct Labor + Direct Material
Conversion Cost = Direct Labor + Manufacturing
Overhead
Nonmanufacturing Costs (PERIOD COSTS)
Selling costs
o
Necessary to secure the order and deliver the
product
Administrative costs
o
Executive, organizational and clerical costs
Income Statement
Format for Merchandising
Format for Manufacturing
Schedule of Cost of Goods Manufactured
Cost Behavior
How a cost will react to changes in the level of activity
within the relevant range
Identify
alternatives
alternative
Select
Develop
budgets to
guide
progress
Formulating long- and
short-term plans Implementing plans Measuring performance Comparing actual to planned performance Decision Making
Variable Costs vs. Fixed Costs
Behavior of Cost (within the relevant range)
Cost
In Total
Per Unit
Variable
Total variable cost
changes as activity level
changes
Variable cost per unit
remains the same over
wide ranges of activity
Fixed
Total fixed cost
remains the same even
when activity level
changes
Average fixed cost per
unit goes down as
activity level goes up
Differential Cost and Revenue
Costs and revenues that differ among alternatives
Opportunity Cost
Potential benefit that is given up when one alternative is
selected over another
Sunk Costs
Costs that have already been incurred and cannot be
changed now or in the future
These costs should be ignored when making decisions
Summary of the Types of Cost Classifications
Financial reporting
Predicting cost behavior (variable/fixed)
Assigning costs to cost objects (direct/indirect)
Making business decisions
III. CHAPTER 3: SYSTEMS DESIGN: JOB-ORDER
COSTING
Types of Product Costing Systems
Process Costing
o
Production of many units of a single,
homogenous product
o
The identical nature of each unit of product
enables assigning the same average cost per unit
o
Basic formula for process costing:
Job-Order Costing
o
Usually used in service-oriented industries
o
Many different products are produced each
period
o
Manufactured to order
o
The unique nature of each order requires tracing
or allocating costs to each job, and maintaining
cost records for each job.
Comparison
Job-Order
Process
Number of jobs worked
Many
Single Product
Cost accumulated by
Job
Department
Average cost computed by
Job
Department
Job Order Costing Overview
Direct materials
and
direct labor
costs are charged to each
job as work is performed
Manufacturing overhead
, including indirect materials and
indirect labor, are allocated rather than directly traced to
each job
Job Cost Sheet
Applying Manufacturing Overhead
An allocation base (a measure such as direct labor-hours
or machine-hours that is used to assign overhead costs to
products and services) is used because:
o
It is impossible/difficult to trace overhead costs
to particular jobs
o
Manufacturing overhead consists of many
different items
o
Many times of manufacturing overhead costs are
fixed in spite of output fluctuation
Predetermined overhead rate
o
Determined before the period begins
o
Enables estimation of total job costs sooner, as
actual overhead is not known until the end of
the period
o
Formula:
Applied Manufacturing Overhead
Note: we use Applied MOH for the COGM schedule.
Manufacturing
Overhead
Direct Labor
Direct Materials
Job 1
Job 2
Job 3
Job-Order Costing Document Flow Summary
*Note: Indirect materials and indirect labor are first included in the
manufacturing overhead account before the job cost sheet
Flow of Costs and Applying Manufacturing Overhead
T-account format ; Journal Entries
Raw Materials
Material
Purchases
DM
IM
Work In Process
(Job Cost Sheet)
DM
DL
Overhead
Applied
Salaries and Wages
Payable
DL
IL
Mfg. Overhead
Actual
Applied
IM
IL
Others
OH
applied to
WIP
Accounting for Nonmanufacturing Cost
These costs are not assigned to individual jobs, rather
they are expensed in the period incurred.
Debit expense, credit asset/liability
Transferring Completed Units
T-account format ; Journal Entries
Work In Process
(Job Cost Sheet)
DM
DL
Overhead
Applied
COGM
Finished Goods
COGM
COGS
Cost of Goods Sold
COGS
Overhead Application Problems
Underapplied overhead
o
Actual MOH > Applied MOH
Overapplied overhead
o
Actual MOH < Applied MOH
Allocation of under/overapplied OH
If MOH is:
ALTERNATIVE 1
Close to COGS
ALTERNATIVE 2
Allocation
Underapplied
Increase
COGS
Increase
WIP
Finished Goods
COGS
Oveapplied
Decrease
COGS
Decrease
WIP
Finished Goods
COGS
New format used for COGM and COGS!
Sales Order
Production
Order
requisition
Materials
form*
Employee
time ticket*
Production
Order
Job cost
sheet
IV. CHAPTER 5: COST BEHAVIOR: ANALYSIS AND
USE
Variable Costs
Cost driver
o
A measure of what causes the incurrence of a
variable cost
Units produced
Machine hours
Labor hours
Miles driven, etc.
Examples of variable costs
Merchandising Manufacturing Merchandising And Manufacturing
Service
>Cost
of
goods sold
>Direct
materials
>Direct labor
>Variable
overhead
>Commissions
>Shipping
costs
>Clerical costs
>Supply
>Travel
>Clerical
True variable cost
o
Total variable cost is directly proportional to the
activity level
o
Variable cost per unit is constant
Step-variable cost
o
Cost of a resource that is obtained in large
chunks and that increases or decreases only in
response to fairly wide changes in activity
The Linearity Assumption and the Relevant Range
Fixed Costs
A cost whose total dollar amount remains constant as the
activity level changes
Average fixed cost per unit decrease as the activity level
increases
Types of fixed costs
o
Committed: long-term, cannot be significantly
reduced in the short term
Depreciation, real estate taxes
o
Discretionary: may be altered in the short-term
by current managerial decisions
Advertising, research and development
Fixed Costs and the Relevant Range
o
The relevant range of activity for a fixed cost is
the range of activity over which the graph of the
cost is flat
o
Concludes that discretionary and committed
fixed costs are really just step-variable costs
In the long run, almost all costs can be
adjusted
o
Difference with step-variable costs
Step-variable costs can often be
adjusted quickly as conditions change
Activity Level Activity LevelTotal Cost Cost Per Unit Activity Level Cost
Small changes in production are unlikely to have any effect on the number of workers employed
Only wide changes in activity level will cause a change in the number of workers employed
We assume a strictly
linear
relationship
between cost and volume
Relevant Range
o
Range of activity
within which the
assumptions
are
reasonably valid
Activity Level Activity Level Total
Cost
Cost Per Unit
Releva nt Range
Width of the steps in step-variable
costs is much narrower
Summary of Cost Behavior Patterns
Cost
In Total
Per Unit
Variable
Total variable cost is
proportional to the
activity level within the
relevant range
Variable cost per unit
remains the same over
ranges of activity
Fixed
Total fixed costs remain
the same even when the
activity level changes
within the relevant range
Average fixed costs per
unit decrease as the
activity level increases
Mixed Costs (semivariable costs)
Contains both variable and fixed cost elements
Can be expressed as an equation
o
Y = total mixed cost
o
a = Total fixed cost
o
b = Variable cost per unit of activity (slope)
Can be obtained with the formula:
o
X = The level of activity
Analysis of Mixed Costs
o
Account analysis
Each account is classified as either
variable or fixed based on the analyst’s
knowledge of how the account behaves
o
Engineering approach
Classifies costs based upon an
industrial engineer’s evaluation of
product methods, and material, labor
and overhead requirements
High-Low Method
o
Steps:
Find b (variable cost per unit) with the
formula:
Find a (fixed cost) with the (derived)
formula:
Use both the “highs” and
“lows” to ensure that the
value of a is constant
Substitute the values of b and a in the
general formula
Least-Squares Regression Method
o
Method used to analyze mixed costs if a
scattergraph plot reveals an approximately linear
relationship between X and Y variables
o
Uses all of the data points to estimate the fixed
and variable cost components of a mixed cost
o
Provides a statistic called R
2, which is a measure
of the goodness of fit of the regression line to
the data points.
o
Goal: to fit a straight line to the data that
minimizes the sum of the squared errors
Contribution Format
The contribution margin format emphasizes cost
behavior. Contribution margin covers fixed costs and
provides for income.
Used primarily by management
Volume Cost Activity Level Total Cost Intercept = total fixed cost Mixed Cost Slope = variable cost/unitFixed cost element Variable cost element
V. COST-VOLUME-PROFIT RELATIONSHIPS
CVP Relationships in Equation Form
Profit formula
Unit CM formula
CVP Graph
Contribution Margin Ratio
Application
Variable Expense Ratio
Formula
Application
Break-Even Analysis
Target Profit
Margin of Safety
The excess of budgeted (or actual) sales over the
break-even volume of sales
Fixed expense
Cost Structure and Profit Stability
Cost structure refers to the relative proportion of fixed
and variable costs in an organization.
High fixed cost (or low variable cost) structures
Advantage
Disadvantage
> Income will be higher in
good years compared to
companies
with
lower
proportion of fixed costs
> Income will be lower in bad
years compared to companies
with lower proportion of fixed
costs
Companies with low fixed cost structures enjoy greater
stability in income across good and bad years.
Operating Leverage
Measure of how sensitive net operating income is to
percentage changes in sales
Concept of Sales Mix
Sales mix – the relative proportion in which a company’s
products are sold
Different products = different selling prices, cost
structures and contribution margin
Key Assumptions of CVP Analysis
Selling price is constant
Costs are linear and can be accurately divided into
variable (constant per unit) and fixed (constant in total)
elements
In multiproduct companies, the sales mix is constant.
In manufacturing companies, inventories do not change.
VI. CHAPTER 11: STANDARD COSTS AND OPERATING
PERFORMANCE MEASURES
Standard Costs
Standards: benchmarks or “norms” for measuring
performance
o
Quantity standards: specify how much of an
input should be used to make a product or
provide a service
o
Price standards: specify how much should be
paid for each unit of input
Management by exception: practice in which deviations
from standards deemed significant are brought to the
attention of management
Variance Analysis Cycle
Setting Standard Costs
Accountants, engineers, purchasing agents, and
production managers combine efforts to set standards
that encourage efficient future operations
Setting Direct Material Standards
Price Standards: final, delivered cost of materials, net of
discounts
Quantity Standards: summarized in a Bill of Materials
Setting Direct Labor Standards
Rate Standards: often a single rate is used that reflects the
mix of wages earned
Time standards: use time and motion studies for each
labor operation
Setting Manufacturing Overhead Standards
Rate Standards: the rate is the variable portion of the
predetermined overhead rate
Quantity Standards: the quantity is the activity in the
allocation base for predetermined overhead
Standard Cost Card
Price and Quantity Standards
Determined separately for the following reasons:
o
The purchasing manager is responsible for raw
material purchase prices; the production
manager is responsible for the quantity of raw
materials used
o
Buying and using activities occur at different
times. Raw material purchases may be held in
inventory for a period of time before using.
General Model for Variance Analysis
1. Prepare standard cost performance report 2. Analyze variances 3. Identify questions 4. Receive explanations 5. Take corrective actions 6. Conduct next period's operations Variance Analysis Price Variance Difference between actual price and standard price Materials PV Labor Rate PV VOH Rate variance Quantity Variance Difference between actual quantity and standard quantity Materials QV Labor efficiency variance VOH efficiency variance A A x B
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. $ 4.00 per lb. $ 12.00 Direct labor 2.5 hours 14.00 per hour 35.00 Variable mfg. overhead 2.5 hours 3.00 per hour 7.50 Total standard unit cost $ 54.50
FORMULAS (Shortcut, as taught by Sir Drex )
Responsibility for Material Variance
Materials Quantity Variance: Production Manager
Materials Price Variance: Purchasing Manager
o
The standard price is used to compute the
quantity variance so that the production
manager is not held responsible for the
purchasing manager’s performance
Responsibility for Labor Variances
Production managers are usually held accountable, for
they can influence:
o
Mix of skill levels assigned to work tasks
o
Level of employee motivation
o
Quality of production supervision
o
Quality of training provided to employees
Variance Analysis and Management by Exception
Larger variances are investigated first
Plotting variance analysis data on a statistical control chart
is helpful in investigation decisions
Advantages of Standard Costs
Management by exception
Promotes economy and efficiency
Enhances responsibility accounting
Simplified bookkeeping
Potential Problems with Standard Costs
Emphasizing standards may exclude other important
objectives
Standard cost reports may not be timely
Invalid assumptions about the relationship between labor
cost and output
Favorable variances may be misinterpreted
Emphasis on negative may impact morale
Continuous improvement may be more important than
meeting standards
Examples
Standard example
Backtracking
VII.
CHAPTER
12:
SEGMENT
REPORTING,
DECENTRALIZATION
AND
THE
BALANCED
SCORECARD
Decentralization
Benefits
o
Top management can concentrate on strategy
o
Lower-level managers gain experience in
decision-making
o
Decision-making authority leads to job
satisfaction
o
Lower-level decisions often based on better
information
o
Lower level managers can respond quickly to
customers
Disadvantages
o
May be a lack of coordination among
autonomous managers
o
Lower-level managers may make decisions
without seeing the “big picture”
o
Lower-level manager’s objective may not be
those of the organization
o
May be difficult to spread innovative ideas in the
organization
Responsibility Center
Cost Center
o
Segment whose manager has control over costs,
but not over revenues or investment funds
Profit center
o
Segment whose manage has control over both
costs and revenues, but not investment funds
Investment center
o
Segment whose manager has control over costs,
revenues, and investments in operating assets
Decentralization and Segment Reporting
Segment: any part or activity of an organization about
which manager seeks cost, revenue or profit data
Segmented Income Statements
Two keys to building:
o
Contribution format should be used because it
separates fixed from variable costs, and enables
calculation of contribution margin
o
Traceable fixed costs should be separated from
common fixed costs to enable the calculation of
a segment margin
o
Common costs should not be allocated to the
divisions, as these would remain even if one of
the divisions were eliminated
Identifying Traceable Fixed Costs
Traceable costs arise because of the existence of a
particular segment and would disappear over time if the
segment itself disappeared.
Common costs arise because of the overall operation of
the company, and would not disappear if any particular
segment were eliminated.
Segment Margin
Computed by subtracting the traceable fixed costs from
its contribution margin
Best gauge of the long-run profitability of a segment
Return on Investment
Measures net operating income earned relative to the
investment in average operating assets
Formulas
Increasing ROI
o
Increase sales
o
Reduce expenses
o
Reduce assets
Net book value: used by most companies to calculate
average operating assets
Residual Income
Another measure of performance
Measures net operating income earned less the minimum
required return on average operating assets
Encourages managers to make profitable investments that
would be rejected by managers using ROI
Disadvantage: Cannot be used to compare the
performance of divisions of different sizes
Formula
Examples
Standard
Backtracking
Income StatementCompany Television Computer
Sales $ 500,000 $ 300,000 $ 200,000 Variable costs 230,000 150,000 80,000 CM 270,000 150,000 120,000 Traceable FC 170,000 90,000 80,000 Division margin 100,000 $ 60,000 $ 40,000 Common costs 25,000 Net operating income $ 75,000
With Analysis
VIII. APPENDIX 12-A – TRANSFER PRICING
Key Concepts
Transfer price: price charged when one segment of a
company provides goods or services to another segment
Objective: motivate managers to act in the best interests
of the overall company
Three approaches
o
Negotiated transfer prices
o
Transfers at the cost to the selling division
o
Transfers at market price
Negotiated Transfer Prices
Results from discussions between the selling and buying
divisions
Advantages:
o
Preserve the autonomy of divisions – consistent
with decentralization
o
Managers are likely to have better information
about potential costs and benefits
Range of Acceptable Transfer Prices
o
Upper limit: buying division
o
Lower limit: selling division
Formulas (Sir Drex’s formulas )
o
Selling Division (Lower limit, LL)
o
Buying Division (Upper limit, UL)
Evaluation
o
If an intracompany would result in higher
profits, there is always a range of transfer prices
within which both the selling and buying
divisions would have higher profits should they
agree to the transfer
o
If managers are pitted against each other rather
than against their past performances, a no
cooperative atmosphere is almost guaranteed
o
Given disputes that accompany the negotiation
process, most rely on other means of setting
transfer prices.
Transfers at the Cost to the Selling Division
Many companies set transfer prices at either the variable
cost or full (absorption) cost incurred by the selling
division
Drawbacks
o
Using full cost can lead to suboptimization
o
Selling division will never show a profit on any
internal transfer
o
Cost-based transfer prices do not provide
incentives to control costs
Transfers at Market Price
Market price (price charged for an item on the open
market) : often regarded as the best approach to the
transfer pricing problem
Works best when the product or service is sold in its
present for to outside customers and the selling division
has no idle capacity
Does not work well when the selling division has idle
capacity
Divisional Autonomy and Suboptimization
Managers should be granted autonomy to set transfer
prices and decide whether to sell internally or externally,
even if it may result in suboptimal decisions
Example
IX. CHAPTER 13: RELEVANT COSTS FOR DECISION
MAKING
Relevant Cost: cost that differs between alternatives
Types of relevant costs
o
Avoidable costs
Types of irrelevant costs
o
Unavoidable costs
o
Sunk costs
o
Future costs that do not differ between
alternatives
Costs that are relevant in one situation may not be
relevant in another context. The manager must examine
the data at hand and isolate the relevant costs in each
situation.
Relevant Cost Analysis
Step 1: Eliminate costs and benefits that do not differ
between alternatives
Step 2: Use the remaining costs (avoidable costs) and
benefits to make a decision.
Total and Differential Cost Approaches
Only rarely will enough information be available to
prepare detailed income statements for both alternatives
Mingling irrelevant costs with relevant costs may cause
confusion and distract attention from critical information
“General Formula” for Differential Cost
Adding or Dropping Segments
Formula
Make or Buy Analysis
When a company is involved in more than one activity in
the entire value chain, it is vertically integrated
o
Advantages
Smoother flow of parts and materials
Better quality control
Realize profits
o
Disadvantage
Companies may fail to take advantage
of supplies who can create economies
of scale advantage by pooling demand
A company must be careful to retain
control over activities that are essential
to maintaining its competitive position
Formula
Whichever is lower should be accepted.
Opportunity Cost: benefit that is forgone as a result of
pursuing some course of action
o
Not actual cash outlays and not recorded in the
formal accounts of an organization
Special Orders
Special Order: one-time order that is not considered part
of the company’s normal ongoing business
Only incremental costs and benefits are relevant
Since manufacturing overhead costs would not be
affected by the order, they are not relevant.
Formula
Examples
Dropping Segments
Make or Buy Analysis
Total Cost
Differential Cost
Constrained Resources
Constraint: limited resource of some type restricts a
company’s ability to satisfy demand
Bottleneck: machine or process that limits overall output
Utilization
o
Fixed costs are usually unaffected, so the
product mix that maximizes the company’s total
contribution margin should be selected
o
A company should not necessarily promote
those products with highest unit CM
o
Total CM will be maximized by promoting
products or accepting orders that provide the
highest CM in relation to the constraint
General formula
Several Methods on Managing Constraints
Working overtime on the bottleneck
Subcontracting some of the processing
Investing in additional machines
Shifting workers to the bottleneck
Focusing business process improvement efforts on the
bottleneck
Reducing defective units processed
Joint Costs
Two or more products produced from a common input
Traditionally allocated among different products at the
split-off point
o
Split-off point: point in the manufacturing
process where each joint product can be
recognized as a separate product
o
Typical approach: allocated joint costs according
to relative sales value of the end products
Can be dangerous for decision making
Sell or Process Further
Joint costs are considered irrelevant here
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 costs incurred after the split-off point
General formula
If there is profit, process further. If loss, sell at split-off
point.
Examples
Managing Constraints
Decrease in direct labor costs (5,000 units @ $3 per unit) $ 15,000
Increase in fixed rental expenses (3,000)
Net annual cost saving from renting the new machine $ 12,000
Net Advantage to Renting the New Machine
Current Situation Situation With New Machine Differential Costs and Benefits Sales (5,000 units @ $40 per unit) $ 200,000 $ 200,000 -Less variable expenses:
Direct materials (5,000 units @ $14 per unit) 70,000 70,000 Direct labor (5,000 units @ $8 and $5 per unit) 40,000 25,000 15,000 Variable overhead (5,000 units @ $2 per unit) 10,000 10,000 -Total variable expenses 120,000 105,000 -Contribution margin 80,000 95,000 15,000 Less fixed expense:
Other 62,000 62,000 Rent on new machine - 3,000 (3,000) Total fixed expenses 62,000 65,000 (3,000) Net operating income $ 18,000 $ 30,000 12,000
Sell or Process Further
o
In this case, the lumber should be processed
further and the sawdust should be sold at
split-off point.
REMINDERS:
Do not forget to bring the ff:
o
CALCULATOR
o
Ruler
o
Assignment notebook
Please don’t rely on this reviewer alone! This is just a
summarized version of the PPTs STUDY WELL! And
best of luck!
Analysis of Sell or Process Further Per Log
Lumber Sawdust
Sales value after further processing $ 270 $ 50 Sales value at the split-off point 140 40
Incremental revenue 130 10
Cost of further processing 50 20 Profit (loss) from further processing $ 80 $ (10)
Per Log Lumber Sawdust Sales value at the split-off point $ 140 $ 40
Sales value after further processing 270 50 Allocated joint product costs 176 24 Cost of further processing 50 20
