ACCT chapter 12
vertical integrated advantages
- smoother flow of parts and materials - better quality control - realize profits
how can a manager increase the capacity of a bottleneck?
- switching more workers over to the machine - working overtime on the bottleneck - investing in additional machines - focusing business improvements on the bottleneck - reducing defective units - reducing some of the processing done at the bottleneck
why do we use the differential approach?
- there won't be enough information for an income statement for both alternatives - putting together irrelevant and relevant costs can cause confusion
vertical integrated disadvantages
-may fail to take advantage of suppliers who can create economies of scale advantage by pooling demand from numerous companies. -be careful to retain control over activities that are essential to maintaining its competitive position.
what are 4 types of decisions contexts?
1) adding/dropping decisions 2) make or buy decisions 3) special order decisions 4) sell or process further decisions
decision making - 2 steps
1) eliminate costs & benefits that are irrelevant 2) use remaining costs & benefits that relevant
differential cost
A future cost that differs between any two alternatives and are always relevant costs.
sunk cost
a cost that can't be taken back and has already been incurred
avoidable cost
a cost that's eliminated by choosing one cost over another ex: movie theater vs renting
costs can distort the keep/drop decision.
allocated fixed
positive # in differential costs and benefits indicates
alternatives favors the new machine
key concept #3
differential analysis-- focusing on future costs and benefits that differ between the alternatives
enables the company to avoid more in fixed costs than it loses in contribution margin
drop product
negative # in differential costs and benefits indicates
favors current situation without new machine
make < buy
financial advantage
1) add/drop segments depends on
financial impact
key concept #5
future cost and benefits that differ between alternatives are irrelevant
key concept #2
identify the criteria for choosing which one - relevant costs/benefits - irrelevant costs/benefits
incremental cost
increase in cost between two alternatives
increasing the capacity of a constrained resource...
increase production and sales
company is not able to avoid as much in fixed costs as it loses in contribution margin
keep product
3) special order
one-time order that is not considered part of the company's normal ongoing business
when looking at a special order...
only the incremental costs and benefits are relevant
what is forgone on a potential new product line?
opportunity cost (its added to total cost in make column)
key concept #6
opportunity costs need to be considered
joint products
products that are made from the same raw material
A typical approach is to allocate joint costs according to the
relative sales value of the end products.
revelvant costs
should be considered when making decisions. - differential cost/revenue - incremental cost - avoidable cost
irrelevant costs
should be ignored when making decisions, because: 1) saves decision makers time and effort. 2) bad decisions can easily result from irrelevant costs - depreciation - sunk costs -future costs that doesn't differ between alternatives
Joint costs are traditionally allocated among different products at the _____.
split-off point.
key concept #4
sunk costs are always irrelevant
opportunity cost
the benefit you miss by choosing the alternative
key concept #1
the first step in decision making is to define the alternatives being considered.
With respect to sell or process further decisions, it is profitable to continue processing a joint product after the split-off point as long as
the incremental revenue from such processing exceeds the incremental processing costs incurred after the split-off point.
bottleneck
the machine or process that is constrained
decision rule on dropping segments
the segment should only be dropped if the profits of the company will increase
Joint costs are irrelevant in decisions regarding what to do with a product from what?
the split-off point forward
two types of decisions approaches.
total cost and differential
vertically integrated
when a company is involved in more than one activity in the value chain
constraint
when a limited resource restricts the companies ability to work
volume trade-off decisions
when companies don't have enough capacity to work through all their sales
split-off point
when joint products are seen as individuals and not made together
4) sell or process further decision
whether a joint product should be sold at split off point or become further processed
2) make or buy decision
whether to create the parts internally or buy them externally
