Relevant Costs
How to calculate the lost CM given up from regular sales:
(CMPU of regular sales)(Units of regular sales) _________________________________________________________________ Units given up in the Special Order
In the Special order decision, if the actual selling price of the special order is > Minimum selling price of the special order
Accept
Opportunity costs are:
Always relevant
Relevant Costs/Costs to Consider
Avoidable Costs and Opportunity Costs
Relevant Costs:
Avoidable costs Opportunity costs
In the make or buy decision, if Avoidable Costs + Opportunity Costs > Outside Purchase Price
Buy
CM per unit of scarce resource formula:
CM per unit/Scarce Resource Needs Per Unit
Special Order Decision Rule
Compare Actual selling price of the special order to the minimum selling price of the special order
Make or Buy Decision Rule
Compare Avoidable Costs + Opportunity Costs to Outside purchase price
Keep or Drop Decision Rule
Compare Avoidable Fixed Costs + Opportunity Costs to Lost Contribution Margin
Sell or Process Further Decision Rule:
Compare the sales value from processing further - additional processing costs to the sales value at the split off point.
Tactical Decision Making
Consists of choosing among alternatives with an immediate or limited end in view Compare a handful of alternatives by analyzing the costs of each alternative The 'least-cost' alternative is chosen
Avoidable Cost
Cost that can be eliminated, in whole or in part, by choosing one alternative over another
Relevant Cost
Cost that differs between alternatives Only relevant costs should be considered in tactical decision making
Joint Costs:
Costs incurred prior to the split-off point
Examples of avoidable costs
Direct Materials Direct Labor All variable costs Some fixed costs
Special Order Decision
Do we accept or reject the special order
In the Keep or Drop decision, if Avoidable fixed costs + Opportunity Costs > Lost CM
Drop
Product Mix Decision
If a company sells more than one product, how many of each type should they produce?
What are joint costs effects on NI
Joint costs are considered in NI but are not relevant costs They are expenses, and still used in calculating net income
In the Keep or Drop decision, if Avoidable fixed costs + Opportunity Costs < Lost CM
Keep
In the make or buy decision, if Avoidable Costs + Opportunity Costs < Outside Purchase Price
Make
5 Types of Tactical Decision Making decisions
Make or Buy Keep of Drop Accept/Reject Special Orders Sell or Process Further Product Mix
Example of a sunk cost
Original price of a building
In the sell or process decision, If the sales value from processing further - additional processing costs > sales value at split off point
Process further
In the Special order decision, if the actual selling price of the special order is < Minimum selling price of the special order
Reject
Examples of Allocated Costs
Rent & Administrative Salaries
Tactical decisions tend to be:
Short run in nature
Keep or Drop Decision
Should we keep or drop a segment of the business
Sell or Process Further:
Should we sell the partially completed products @ split off point or should we process them further?
Make or Buy Decision
Should you produce the product internally, or should it be purchased from the outside supplier
Examples of unavoidable costs:
Some fixed costs depending on the situation
What kind of costs are joint costs? Are they relevant?
Sunk costs, not relevant
Joint Products:
Two or more products produced from the same raw material input
Non Relevant Costs/Costs to ignore
Unavoidable Costs Allocated Costs Some Fixed Costs Sunk Costs
Costs to be ignored/Irrelevant Costs:
Unavoidable costs Allocated Costs Sunk Costs
When there is more than one resource constraint in the product mix decision:
Use linear programming
How to calculate minimum selling price of special order:
VCPU of special order + CM lost from 'given up' regular sales
Avoidable costs are:
always relevant
Opportunity Costs:
benefit given up by choosing an alternative over another
Sunk costs
cost that has been incurred and cannot be recovered by some future action
Allocated Costs
costs that cannot be directly linked to a product or activity
Unavoidable Costs
costs that exist under all decision alternatives
In the product mix decision, the company should produce the product that
has the highest CM per unit of scarce resource
Sunk costs are:
never relevant
Unavoidable costs are:
never relevant
Split off point:
the point in manufacturing where each joint product can be recognized as a separate product