Relevant costing/ Accounting information for decision making

special order

-affects output levels -additional revenue> additional costs= accept -capacity levels -fixed costs must be able to cover extra units

make or buy

-factors; quality, reputation, security, employee morale, control. -relevant costs to make instead of buying -relevant costs make > relevant costs to buy= buy the product. -greater CM will cover more of the fixed costs. -long term strategy to minimise supplier risks e.g. enter into long run contract -constrained capacity? consider the opportunity cost

add/delete

-revenue loss? -affect on profitability of other products -short term vs. long term -ignore unavoidable expenses -will some expenses avoidable but you will still have to pay regardless? -sales -avoidable costs= positive=add -interdependencies

sales doesn't equal production

OP of DC doesn't equal OP of AC

Explain how production volume impacts on absorption costing profit.

PVV only occurs in absorption costing. if production doesn't equal normal volume there will be a variance.

absorption costing income statement

Sales Less COGS Gross margin Less period costs Fixed admin Variable sales commission

variable costing income statement

Sales Less VC VMOH V selling costs Contribution margin Less fixed costs FMOH Fixed admin

customer profitability

are the customers of benefit or are they a liability? -ignore allocated overhead -consider opportunity cost

Explain 'sunk costs' and why they are considered irrelevant to decisions.

costs that are unavoidable and won't change no matter what action you take.

production > Normal volume

favourable decrease in COGS increase in GM

cost based

good for differentiated products and will ignore demand cost + markup

value added

if eliminated this would reduce the actual or perceived value or utility customers obtain from the use of product or service.

Be aware of the role of 'excess capacity' in decision-making and its significance for cost analysis

in relation to product mix decisions. relates to both the demand and capacity in the short run. if a companies demand is below their capacity they have the ability to run a special price or special order

Explain the importance of the time horizon in decision making and its impact on relevant cost/revenue

in the short term a cost is more likely to be fixed but as time goes on they will most likely become variable. or in a short run decision a company may lack capacity or experience great demand leading to a large price spike.

Explain the concept of relevant costs and relevant revenues and how this is potentially different from the notion of fixed and variable costs

relevant costs and revenues are future costs and revenues that differ among alternatives. they are to be used in decision making. irrelevant costs are things that cannot change no matter what action you take.Usually fixed costs will be irrelevant and variable will be relevant but you must not make this assumption automatically.

pricing and profitability

select and increase products that yield the highest contribution margin of the constrained resource.

internal value chain

sequence of business functions in which customer usefulness is added to the product/service.

lifecycle costs

system that tracks and accumulates business function costs of the value chain attributable to each product. -product or customer

incremental costs

the additional total cost incurred for an activitiy

opportunity costs

the contribution to operating income that is foregone or rejected by not using a limited resource in its next best alternative

differential costs

the difference in total cost between two alternatives

product lifecycles

the time span from the initial research and development to when customer service and support is no longer on offer for that product

Understand that accounts drawn up for financial accounting purposes often blend fixed/variable, relevant/irrelevant costs, and therefore cost accounting information for decision-making often needs to be specifically constructed for the decision at hand.

they are blended sometimes even though they act very differently. e.g. if you are given a question with the total manufacturing costs you have to determine the variable and fixed components.

production < normal volume

unfavourable increase in COGS decrease in CM

market based

useful in competitive markets where the process is target pricing

what drives operating profit in variable and absorption costing

variable = unit level of sales absorption= unit level of sales, unit level of production and denominator volume for allocating fixed costs.

avoidable costs

variable costs that can be taken out of the equation unlike fixed costs

what is the main difference between variable and absorption costing

variable will cost the fixed component as an expense in the current year where as absorption will treat the fixed overhead as an inventorial cost and the cost will follow the periods the inventory is used in.