Managerial Accounting: Chapter 13- Differential Analysis- The Key to Decision Making
Vertical Integration Disadvantages
1. Companies may fail to take advantage of suppliers who can create economies of scale advantage by pooling demand from numerous companies. 2. While the economics of scale factor can be appealing, a company must be careful to retain control over activities that are essential to maintaining its competitive position.
Using the differential approach is desirable for two reasons:
1. Only rarely will enough information be available to prepare detailed income statements for both alternatives. 2. Mingling irrelevant costs with relevant costs may cause confusion and distract attention away from the information that is really critical.
Vertical Integration Advantages
1. smoother flow of parts and materials 2. better quality control 3. realize profits
joint input
>common production process(split off point)> oil, gas, chemicals
An avoidable cost is?
A cost that can be eliminated by choosing one alternative over another
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.
An incremental cost is?
An increase in cost between two alternatives
Every decision involves what?
Choosing from amoung at least 2 alternatives
Opportunity costs also need to be considered when?
Making decisions
An opportunity cost is the ?
Potential benefit that is given up when one alternative is selected over another
Once you have defined the alternatives you need to identify what?
The criteria for choosing among them
Vertically Intergrated
When a company is involved in more than one activity in the entire value chain
"Make or buy" decision
a decision concerning whether an item should be produced internally or purchased from an outside supplier
Special Order
a one-time order that is not considered part of the company's normal ongoing business
sunk costs are?
always irrelevant when choosing among alternatives
Opportunity Cost
are not actual cash outlays and are not recorded in the formal accounts of an organization
the machine or process that is limiting overall output is called
bottleneck - it is the constraint.
When a limited resource of some type restricts the company's ability to satisfy demand, the company is said to have a ______
constraint
The first step in decision making is what?
define the alternatives being considered
The key to effective decision making is?
differential analysis-focusing on the future costs and benefits that differ between the alternatives
a future cost that differs between any two alternatives
differential cost
Future revenue that differs between any two alternatives is known as
differential revenue
Irrelevant costs and irrelevant benefits should be?
ignored when making decisions
Increasing the capacity of a constrained resource should lead to
increased production and sales
Future costs and benefits that do not differ between alternatives are ______ costs to the decision-making process.
irrelevant
A sunk cost is a cost that?
is a differential cost. has been incurred and cannot be estimated. is also never relevant in decision-making
When analyzing a special order
only the incremental costs and benefits are relevant
Split off point
that point in the manufacturing process where some or all of the joint products can be recognized as individual products
Relative sales value
to accurately value each unit, the common and most logical practice is to allocate the total among various units on this basis of this
One of the most important decisions managers make is wether
to add or drop a business segment
joint products
two or more products that are produced from a common input
Companies are forced to make ________ when they do not have enough capacity to produce all of the products and sales volumes demanded by their customers
volume trade-off decisions
Managing Constraints
work overtime, hire subcontractors, shift more workers to processes that are bottlenecks, invest in additional equipment, process improvements
