ACCT2123-CH12-DIFFERENTIAL_ANALYSIS:THE_KEY_TO_DECISION_MAKING-NOTES

how much cost savings when moving manufacturing operations oversea?

80%

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.

which of the following are ways in which to calculate the benefit of selecting one alternative over another?

An analysis that looks at all costs and benefits and identifies those that are differential **An analysis that just looks at the relevant costs and benefits The difference between the net operating income for the two alternatives

relevant benefit

a benefit that differs between alternatives in a decision. Differential revenue is a relevant benefit

avoidable cost

a cost that can be eliminated by choosing one alternative over another in a decision. This term is synonymous with differential cost and relevant cost.

make or buy decision

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

differential cost

a difference in cost between two alternatives.

relevant cost

a different in cost between any two alternatives. Synonyms are avoidable cost, differential cost, and incremental cost

constraint

a limitation under which a company must operate, such as limited available machine time or raw materials, that restricts the company's ability to satisfy demand.

bottleneck

a machine or some other part of a process that limits the total output of the entire system

special order

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

value chain

a value chain includes activities ranging from development to production to after-sales service

relaxing the constraint

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

joint cost:

are irrelevant in decisions regarding what to do with a product after split-off cannot be avoided once a process is started although the allocation of joint product cost is needed for some purposes, such as balance sheet inventory valuation, allocations of this kind are extremely misleading for decision making. The In Business box "Getting It All Wrong" illustrates an incorrect decision that resulted from using such an allocated joint cost.

if a cost is traced to a segment using activity-based costing

as discussed in an earlier chapter, activity-based costing can be used to help identify potentially relevant costs for decision-making purposes. Activity based costing improves the tractability of costs by focusing on the activities caused by a product or other segment. However, managers should excercise caution against reading more into this "traceability" than really exist. People have a tendency to assume that if a cost is traceable to a segment, then the cost is automatically an avoidable cost. That is not true because the costs provided by a well-designed activity-based costing system are potentially relevant. Before making a decision, managers must still decide which of the potentially relevant costs are actually avoidable. Only those costs that are avoidable are relevant and the others should be ignored. IT MAY OR MAY NOT BE AN AVOIDABLE COST OF THE SEGMENT

intermediate product

as it applies to sell or process further decision, intermediate product is in the process of being made

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

avoidable cost

joint cost

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

one of the great dangers in allocating common ___ costs is that such allocations can make a product line look less profitable than it really is

fixed

when to retain an unprofitable line

if the product line acts as a magnet to attract customers if the product line helps sell other products or if it acts as a magnet to attract the customer

which of the following statements are true

joint costs are common costs that are incurred to produce two or more products allocation of joint-costs is needed for inventory valuation improper allocation of joint costs can lead to incorrect decisions.

if, by dropping a product line a company cannot avoid as much in fixed costs as it loses in contribution margin, the company should

keep the product line

which of the following should not be included in the analysis when making a decision?

non-differential future costs sunk costs

advantage of using external suppliers

one advantage of using external suppliers instead of vertical integration is that suppliers can pool demand from a number of companies and enjoy economies of scale, which can result in higher quality and lower costs than a company could obtain if it made the parts on its own

opportunity cost in accounting records

opportunity costs are not found in accounting records because they are not cash outlays. Opportunity costs are relevant to decisions.

Only rarely will enough information be available to prepare a detailed income statement for both alternatives in a decision. This makes isolating___ costs desirable.

relevant

split-off point

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

differential revenue

the difference in revenue between two alternatives

opportunity cost

the potential benefit that is given up when one alternative is selected over another.

joint products

two or more products that are produced from a common input

linear programming

what does a company do if it has more than one potential constraint? For example, a company may have limited raw materials, limited direct labor-hours available, limited floor space, and limited advertising dollars to spend on product promotion. How would it determine the right combination of product to produce? The proper combination or "mix" of product can be found by use of a quantitative method known as linear programming, which is covered in quantitative methods and operations management courses.

contribution margin

when making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative income statement.