Managerial Accounting- Chapter 11 Differential Analysis

production bottleneck

a point in the manufacturing process where the demand for the company's product exceeds the ability to produce the product

the book value of the old equipment is

a sunk cost, and thus, is irrelevant.

the normal selling price must be set high enough to cover

all costs and expenses (fixed and variable) and provide a reasonable profit.

discontinuing the product or segment usually eliminates

all of the product's or segment's variable costs.

differential analysis

also called incremental analysis, analyzes differential revenues and costs in order to determine the differential impact on profit of two alternative courses of action.

in some cases, a product can be sold at either

an immediate state of production or it can be processed further and then sold

in deciding whether to accept additional business at a special price, only what costs are considered?

differential

what kind of costs may not be eliminated when discontinuing a segment or product?

fixed costs like depreciation, insurance, and property taxes

target costing is useful in

highly competitive markets. they require continual product cost reductions to remain competitive

differential revenue, such as interest revenue, could arise from

investing the cash created by the two alternatives of differential revenue from investing funds and differential income tax.

differential analysis can be used to decide whether to

make or buy a part

special prices in one geographic area may result in

price reductions in other areas, with the result that total company sales revenues decrease.

what are the three cost plus methods to determine the selling price?

product cost, total cost, variable cost

in a production bottleneck operation, the best measure of profitability is

the unit contribution margin per bottleneck constraint

the costs of producing the immediate product do not change, regardless of

whether the immediate product is sold or processed further.

the usefulness of a fixed asset may decrease before it is

worn out

theory of constraints

a manufacturing strategy that focuses on reducing the influence of bottlenecks on production processes

target costing

a method of setting prices that combines market based pricing with a cost reduction emphasis. a future selling price is anticipated, using the demand or competition based methods

management may lease or sell a piece of equipment that is no longer needed. This may occur when a company

changes its manufacturing process and can no longer use the equipment in the manufacturing process.

companies often manufacture products made up of

components that are assembled into a final product.

sunk costs

costs that have been incurred in the past, cannot be recouped, and are not relevant to future decisions.

what are the two market methods to determine selling price?

demand based method and competition based method

cost plus method

determines the normal selling price by estimating a cost amount per unit and adding a markup. normal selling price= cost amount per unit + mark up.

differential income tax could arise from

differences in income

a product, department, branch, territory, or other segment of a business may be generating losses. as a result, management may consider

discontinuing (eliminating) the product or segment

if the company is operating at less than full capacity, then the additional production does not

increase fixed manufacturing costs. (however, selling and administrative expenses may change because of the additional business)

differential analysis is illustrated for the following common decisions:

leasing or selling equipment, discontinuing an unprofitable segment, manufacturing or purchasing a needed part, replacing fixed assets, selling a product or processing further, and accepting additional business at a special price.

when a company has a production bottleneck in its production process, it should attempt to

maximize its profits, subject to the production bottleneck. in doing so, the unit contribution margin of each product per production bottleneck constraint is used

a company may be offered the opportunity to sell its products at prices other than

normal prices

the differential costs of accepting additional business depend on whether the company is

operating at less than capacity

differences between the remaining useful life of the old equipment and the estimated life of the new equipment could exist. in addition, the new equipment might improve the

overall quality of the product and, thus, increase sales.

what other factors should be considered in the differential analysis of make or buy?

productive capacity used to make the instrument panel would not be available for other production. the decision may also affect the future business relationship with the instrument panel supplier

any price greater than the differential costs will increase

profits in the short term (but in the long term, products are sold at normal prices rather than special prices)

robinson patman act

prohibits price discrimination within the united states unless price differences can be justified by different costs.

the demand based method

sets the price according to the demand for the product. if there is high demand for the product, then the price is set high. if there is a low demand for the product, then the price is set low.

competition based method

sets the price according to the price offered by competitors. if a competitor reduces the price, then management adjusts the price to meet the competition

in product pricing, the use of estimates based on ideal operating performance could lead to

setting product prices too low

costs can be reduced by

simplifying the design, reducing the cost of direct materials and direct labor costs, eliminating waste

differential cost

the amount of increase or decrease in cost that is expected from a course of action as compared to an alternative.

differential revenue

the amount of increase or decrease in revenue that is expected from a course of action compared to an alternative.

under the product cost method, the costs of manufacturing the product, termed the product costs, are included in

the cost amount per unit to which the markup is added.

differential analysis can be used for decisions to replace fixed assets. the analysis normally focuses on

the costs of continuing to use the old equipment versus replacing the equipment.

the target cost is normally less than

the current cost, thus managers try to reduce costs

management determines the markup based on

the desired profit for the product

differential profit (loss)

the difference between the differential revenue and differential costs. Differential profit indicates that a decision is expected to increase income, while a differential loss indicates the decision is expected to decrease income.

the target cost is estimated as

the difference between the expected market price and the desired profit

the differential revenue from accepting the additional business is compared to

the differential costs of producing and delivering the product to the customer

the fixed factory overhead cannot be eliminated by purchasing the panels, thus both alternatives include

the fixed factory overhead

estimated selling expenses, administrative expenses, and desire profit are included in

the markup.

cost drift

the planned cost reduction.

the mark up per unit is added to

the product cost per unit to determine the normal selling price

opportunity cost

the revenue that is forgone from an alternative use of an asset, such as cash. it is useful in analyzing alternative courses of action.

the normal selling price

the target selling price to be achieved in the long term.

what may also affect the decision to replace equipment?

the time value of money and other uses for the cash needed to purchase the new equipment.

it is possible for total company income to decrease rather than increase if

the unprofitable product or segment is discontinued

estimates should be based on normal operating levels and not

theoretical levels of performance.

unit contribution margin per production bottleneck hour=

unit contribution margin/ heat treatments hours per unit

if unused capacity could be used in manufacturing the part, then what costs would increase?

variable factory overhead