accctg ch. 12

adding a line

+ incremental CM if added -increase in FC +/- opportunity cost = change in NOI from adding

cons of vertical integration

- Better economies of scale, which may reduce costs and improve quality

dropping a line

- CM lost if discontinued + FC that can be avoided (traceable costs) +/- opportunity costs =change in NOI from dropping

pros of vertical integration

-Less dependent on suppliers -Not paying markups on externally-purchased goods -Perhaps better quality controls

Why Isolate Relevant Costs?

-Mingling irrelevant costs with relevant costs may cause confusion and distract attention from the critical information -The danger exists that an irrelevant piece of data may be used improperly, resulting in an incorrect decision (or wrong test answer) -The best approach is to ignore irrelevant data and base the decision entirely on relevant data

specific business decision scenarios..

-drop or retain a segment -make or buy -fill a special order -how to manage constrained resources -sell now or process further

future costs that do not differ among alternatives

-going to happy no matter what -but not a sunk cost because it has not yet been incurred

adding and dropping product lines

-hinges on the effect it has on NOI -cant just drop a segment because the segments NOI is negative, because that is often misleading as common costs or sunk costs could be driving it to be negative when the segment is actually providing a positive NOI

important to distinguish between relevant and irrelevant costs bc

1. irrelevant data can be ignored- saving decision makers tremendous time 2. bad decisions can easily result from erroneously including irrelevant costs and benefits

whats relevant for decisions?

1. pertains to the future 2. differs between alternatives

joint products

2+ products that are pro ducted from a common input

CM per unit of constraint

=CM per unit / machine hours per unity

Vertical integration

When a company is involved with multiple components of the value chain

avoidable cost

a cost that can be eliminated by choosing one alternative over another -relevant cost

sunk cost

a cost that has already been incurred and cannot be avoided regardless of what a manager decided to do -always the same no matter what alternatives are being considered; therefore irrelevant

relevant benefits

benefits that differ between alternatives

bottleneck

capacity of an entire system is limited by a single number of components or resources -all production effects should go towards increasing capacity at the bottleneck -the bottleneck is the weakest link

Make or buy decision

carrying out value-chain activity internally versus buying from a supplier

relevant costs

costs that differ between alternatives

differential analysis

focusing on the costs and benefits that differ between alternatives

when deciding to drop a line

if dropping it enables the company to avoid more in FC than it loses in CM, then its overall NOI will improve by dropping the product line

sell or process further decisons

joint costs are irrelevant regarding what to do with a product from split off point -once split off point joint costs are already incurred and nothing you can do about them -it is profitable to continue processing a joint product after the split off pout so long as the incremental revenue from such processing exceeds the incremental processing cost incurred after the split off point

outsourcing

largely about scale and the ability to provide services at a more competitive price

special orders

one time order that is not considered part of the companies normal ongoing business

split off point

point in manufacturing process at which the joint products can be recognized as separate products

offshoring

primarily driven by the dramatic wage- cost differentials that exist between developed and developing countries

joint costs

term to describe the costs incurred up to the split off point -common costs that are incurred to simultaneously produce a variety of end products -traditionally allocated among the different products at the split off point

multiple constraints

when more than one constrain exists