Relevant costs

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Actual selling price of special order > min selling price of a special order

Accept special order

A cost that can not be directly linked to a product or activity. It is therefore assigned to the product or activity using some sort of arithmetic process

Allocated cost

A relevant cost is a cost that differs between

Alternatives

Blank costs are always relevant

Avoidable

A cost that can be eliminated, either in whole or part, by choosing one alternative over another

Avoidable cost

Avoidable costs + opportunity costs > outside purchase price

Buy

Contribution margin per unit/scarce resource needs per unit=

Cm per unit of scarce resource

(CM per unit on regular reg sales x units of regular sales given up)/ units in the special order

Contribution margin lost

Examples of avoidable costs

Direct materials, direct labor, all variable costs, some fixed costs

Avoidable fixed costs + opportunity costs > lost contribution margin

Drop

Original cost of a building when you're trying to decide whether or not to sell the business later on

Example of a sunk cost

Use a mathematical technique called linear programming to determine the optimal mix of products. Used when a company

Has more than 1 resource constraint

Costs incurred up to the split off point

Joint costs

Two or more products produced from the same raw material input

Joint products

Avoidable fixed costs + opportunity costs < lost contribution margin

Keep

Company must decide whether a segment of a business should be kept or eliminated

Keep or drop decision

Tactical decision making compare a handful of alternatives by analyzing the costs of each alternative. The blank

Least cost alternative is chosen

Avoidable costs + opportunity costs < outside purchase price

Make

Should a component part to the company's product or service be produced or purchased

Make or buy

Variable costs per unit in special order + cm lost from given up regular sales

Minimum selling price of a special order

Joint costs are considered in calculating

Net income because they're expenses

Unavoidable costs are

Never relevant

Are allocated costs ever relevant

No

Are fixed costs relevant

No

The company should produce those products that have the highest contribution margin per unit

Of the scarce resource

(Sales value from further processing - additional processing costs) > sales value at the split off point

Only Process further when

If a company produces and sells more than one product, how many of each product should be produced

Product mix decison

Actual selling price of special order < min selling price of a special order

Reject special order

Not all costs are blank to the decision

Relevant

Only blank should be considered in deciding which alternative to pick

Relevant costs

Examples of allocated costs

Rent and administrative salaries

Sound tactical decision making means that decisions made achieve not only their limited objective but also

Serve a larger purpose

Tactical decisions tend to be blank but many have long run consequences

Short run in nature

Example of unavoidable costs

Some fixed costs

Orders that are not part of a company's regular sales

Special order decisions

The point in the manufacturing process where each joint product can be recognized as a separate product

Split off point

1. Define your decision variables 2. Determine the objective function (always max CM) 3. Determine resource constraints 4. Solve to find optimal product mix

Steps to linear programming

Cost that has been incurred and can not be recovered or un-incurred by some future action. Are never relevant

Sunk cost

Consists of choosing among alternatives with an immediate or limited end in view

Tactical decision making

Special orders are blank usually requested at a lower selling price than regular sales

Typically one time orders

A cost that exists under all decision alternatives

Unavoidable

Depreciation is always

Unavoidable

Joint costs are sunk costs. Can't be recovered and should be ignored in making sell or process further decision

Why joint costs aren't relevant


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