Accounting 203 Exam 2

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Advantages of using external suppliers

-By pooling demand from a number of companies, a supplier may be able to enjoy economies of scale -Economies of scale can result in higher quality and lower costs than would be possible if the companying attempted to do it all on its own

Advantages of vertical integration

-Less dependence on suppliers -Smoother flow of parts and materials for production -Some companies feel that they can control the quality better by producing their own parts and materials (rather than relying on quality control standards if outside suppliers) -An integrated company realizes profits from the parts and materials that it is "making" rather than "buying", as well as profits from its regular operations

allocated common costs

-are only relevant to a decision if they are avoidable --- unavoidable (like regular fixed costs) are irrelevant -unless told otherwise these are irrelevant

Six key concepts for decision making

1). Define the alternatives being considered 2). Identify criteria for choosing among alternatives 3). Focusing on the future costs and benefits that differ between the alternatives 4). Sunk costs are always irrelevant when choosing between alternatives 5). Future costs and benefits that do not differ between alternatives are irrelevant 6). Opportunity costs need to be considered when making decisions

differential cost

A future cost that differs between any two alternatives -- always relevant costs

differential revenue

A future revenue that differs between any two alternatives -- always relevant benefits

calculating sourcing decision

Calculate the cost of making and the cost of buying and then find out the difference

joint costs

Costs incurred up to the split-off point in a process in which two or more products are produced from a common input are called (are irrelevant in decisions regarding what to do with a product after split-off)

Avoidable cost

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

sell or process further decision

a decision as to whether a joint product should be sold at the split-off point, or processed further

sourcing 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 one-time order that is not considered part of the company's normal ongoing business

intermediate product

a product that is past the split-off point, but is not yet a finished product

value chain

all of the activities from development, to production, to after-sales service

Incremental costs

an increase in cost between two alternatives (relevant)

segment

any part or activity of an organization about which a manager seeks cost, revenue, or profit data

avoidable costs (and incremental costs)

are always relevant costs

traceable fixed costs

arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared

common fixed costs

arise because of the overall operation of the company and would not disappear if any particular segment were eliminated

sunk cost

cost that is irrelevant and should be ignored when making decisions

Differential analysis

focuses on the future costs and benefits that differ between the alternatives. Everything else is irrelevant and should be ignored.

special order decision

involves deciding whether to accept or reject an order that is outside the scope of normal sales

segment margin

is computed by subtracting the traceable fixed costs of a segment from its contribution margin

segment margin

is the best gauge of the long-run profitability of a segment

traceable fixed costs

should be separated from common fixed costs to enable the calculation of a segment margin

split-off point

the point in a manufacturing process where joint products can be recognized as separate products

joint products

two or more products that are produced from a single raw material input (ex: gasoline and jet fuel)

Vertical integration

when a company is involved in more than one activity in the entire value chain


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