Relevant costs
Actual selling price of special order > min selling price of a special order
Accept special order
A cost that can not be directly linked to a product or activity. It is therefore assigned to the product or activity using some sort of arithmetic process
Allocated cost
A relevant cost is a cost that differs between
Alternatives
Blank costs are always relevant
Avoidable
A cost that can be eliminated, either in whole or part, by choosing one alternative over another
Avoidable cost
Avoidable costs + opportunity costs > outside purchase price
Buy
Contribution margin per unit/scarce resource needs per unit=
Cm per unit of scarce resource
(CM per unit on regular reg sales x units of regular sales given up)/ units in the special order
Contribution margin lost
Examples of avoidable costs
Direct materials, direct labor, all variable costs, some fixed costs
Avoidable fixed costs + opportunity costs > lost contribution margin
Drop
Original cost of a building when you're trying to decide whether or not to sell the business later on
Example of a sunk cost
Use a mathematical technique called linear programming to determine the optimal mix of products. Used when a company
Has more than 1 resource constraint
Costs incurred up to the split off point
Joint costs
Two or more products produced from the same raw material input
Joint products
Avoidable fixed costs + opportunity costs < lost contribution margin
Keep
Company must decide whether a segment of a business should be kept or eliminated
Keep or drop decision
Tactical decision making compare a handful of alternatives by analyzing the costs of each alternative. The blank
Least cost alternative is chosen
Avoidable costs + opportunity costs < outside purchase price
Make
Should a component part to the company's product or service be produced or purchased
Make or buy
Variable costs per unit in special order + cm lost from given up regular sales
Minimum selling price of a special order
Joint costs are considered in calculating
Net income because they're expenses
Unavoidable costs are
Never relevant
Are allocated costs ever relevant
No
Are fixed costs relevant
No
The company should produce those products that have the highest contribution margin per unit
Of the scarce resource
(Sales value from further processing - additional processing costs) > sales value at the split off point
Only Process further when
If a company produces and sells more than one product, how many of each product should be produced
Product mix decison
Actual selling price of special order < min selling price of a special order
Reject special order
Not all costs are blank to the decision
Relevant
Only blank should be considered in deciding which alternative to pick
Relevant costs
Examples of allocated costs
Rent and administrative salaries
Sound tactical decision making means that decisions made achieve not only their limited objective but also
Serve a larger purpose
Tactical decisions tend to be blank but many have long run consequences
Short run in nature
Example of unavoidable costs
Some fixed costs
Orders that are not part of a company's regular sales
Special order decisions
The point in the manufacturing process where each joint product can be recognized as a separate product
Split off point
1. Define your decision variables 2. Determine the objective function (always max CM) 3. Determine resource constraints 4. Solve to find optimal product mix
Steps to linear programming
Cost that has been incurred and can not be recovered or un-incurred by some future action. Are never relevant
Sunk cost
Consists of choosing among alternatives with an immediate or limited end in view
Tactical decision making
Special orders are blank usually requested at a lower selling price than regular sales
Typically one time orders
A cost that exists under all decision alternatives
Unavoidable
Depreciation is always
Unavoidable
Joint costs are sunk costs. Can't be recovered and should be ignored in making sell or process further decision
Why joint costs aren't relevant
