Managerial Accounting Chapter 6

volume trade-off decisions

companies must trade-off, or sacrifice production of some products in favor of others in an effort to maximize profits

joint costs

cost that are incurred up to the split-off point in a process that produces joint products

vertical integration advantages: (make advantages)

- an integrated company is less dependent on its suppliers and may be able to ensure a smoother flow of parts and materials for production than a nonintegrated company - some companies feel they can control quality better by producing their own parts and materials - an integrated company realizes profits from the parts and materials that it is "making" rather than "buying"

Buy Advantage

- enjoy economic scale - higher quality and lower costs

to make a sell or process further decision, managers need to follow a three step process:

1. always ignore all joint costs 2. determine the incremental revenue that is earned by further processing the joint product 3. take the incremental revenue from step two and subtract the incremental costs associated with processing the joint product beyond the split-off point

6 Key Concepts to Decision Making

1. define the alternatives being considered 2. distinguish between relevant and irrelevant costs & benefits (consider relevant factors, ignore irrelevant factors) 3. differential analysis 4. sunk costs are always irrelevant 5. future costs and benefits that do not differ between alternatives are irrelevant 6. opportunity costs need to be considered

differential revenue

future revenue that differs between any two alternatives

future costs and benefits that do not differ between alternatives are ...

irrelevant to the decision-making process

opportunity cost

the potential benefit that is given up when one alternative is selected over another (considered financial advantage / disadvantage)

activity-based costing improves ___________________ of costs by focusing on the activities caused by a product or other segment

traceability

joint products

two or more products that are produced from a common input

when do companies have to make volume trade-off decision?

when they do not have enough capacity to produce all of the products and sales volumes demanded by their customers

split-off point

that point in the manufacturing process where some or all of the joint products can be recognized as individual products

a comparative format shows...

the effects of either keeping or dropping the product line

vertical integration

the involvement by a company in more than one of the activities in the entire value chain from development through production, distribution, sales, & after-sales service

the costs provided by a well-designed activity-based costing system are only ______________ relevant

potentially

activity-based costing can be sued to identify:

potentially relevant costs for decision-making purposes

differential costs and benefits can be _______________ or _______________

qualitative or quantitative

differential costs are always __________ costs, differential revenue is a ______________ benefit

relevant ; relevant

a special order should be ___________ if the incremental revenue from the special order exceed the incremental costs of the order

accepted

call chain

all activities from development to production to after - sales service

relaxing (or elevating) the constraint

an action that increases the amount of constrained resource. equivalently, an action that increases the capacity of the bottleneck

incremental cost

an increase in cost between two alternatives

bottleneck

another word for constraint, a machine or some other part of a process that limits the total output of the entire system

constraint

anything that prevents you from getting more of what you want

always ignore _________ costs

joint

a danger in allocating common fixed costs is that such allocations can make a product line ...

look less profitable than it really is

special order

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

three steps to a volume trade-off decision:

1. define the meaning of a constraint 2. explain how to determine the most profitable use of a constrained resource 3. discuss how to determine the value of obtaining more of a constrained resource & how to manage constraints to increase profits

with special orders, there are 2 important things that must be true:

1. there is indeed idle capacity 2. the special order does not but into normal sales or undercut prices on normal sales

relevant benefits

a benefit that should be considered when making decisions

avoidable cost

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

sunk cost

a cost that has already been incurred and cannot be changed regardless of what managers decide to do

relevant costs

a cost that should be considered when making decisions

sell or process further decision

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

make or buy decision

a decision concerning whether an item should be produced internally or purchased from an outside supplier

differential cost

a future cost that differs between any two alternatives

differential cost approach

focuses solely on the relevant costs and benefits *derives financial (dis) advantage

differential analysis

focusing on future costs and benefits that differ between the alternatives

opportunity costs represent economic benefits that are ...

foregone as a result of pursuing some course of action

with a volume trade-off situation, favor the products that provide the ...

highest contribution margin per unit of the constrained resource

irrelevant costs and irrelevant benefits should be ...

ignored when making decisions

total cost approach

includes all of the costs and benefits - relevant or not

_______________ cost and ______________ cost are used to describe differential costs

incremental ; avoidable