Accounting 203 Exam 2
Advantages of using external suppliers
-By pooling demand from a number of companies, a supplier may be able to enjoy economies of scale -Economies of scale can result in higher quality and lower costs than would be possible if the companying attempted to do it all on its own
Advantages of vertical integration
-Less dependence on suppliers -Smoother flow of parts and materials for production -Some companies feel that they can control the quality better by producing their own parts and materials (rather than relying on quality control standards if outside suppliers) -An integrated company realizes profits from the parts and materials that it is "making" rather than "buying", as well as profits from its regular operations
allocated common costs
-are only relevant to a decision if they are avoidable --- unavoidable (like regular fixed costs) are irrelevant -unless told otherwise these are irrelevant
Six key concepts for decision making
1). Define the alternatives being considered 2). Identify criteria for choosing among alternatives 3). Focusing on the future costs and benefits that differ between the alternatives 4). Sunk costs are always irrelevant when choosing between alternatives 5). Future costs and benefits that do not differ between alternatives are irrelevant 6). Opportunity costs need to be considered when making decisions
differential cost
A future cost that differs between any two alternatives -- always relevant costs
differential revenue
A future revenue that differs between any two alternatives -- always relevant benefits
calculating sourcing decision
Calculate the cost of making and the cost of buying and then find out the difference
joint costs
Costs incurred up to the split-off point in a process in which two or more products are produced from a common input are called (are irrelevant in decisions regarding what to do with a product after split-off)
Avoidable cost
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 processed further
sourcing decision
a decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier
special order
a one-time order that is not considered part of the company's normal ongoing business
intermediate product
a product that is past the split-off point, but is not yet a finished product
value chain
all of the activities from development, to production, to after-sales service
Incremental costs
an increase in cost between two alternatives (relevant)
segment
any part or activity of an organization about which a manager seeks cost, revenue, or profit data
avoidable costs (and incremental costs)
are always relevant costs
traceable fixed costs
arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared
common fixed costs
arise because of the overall operation of the company and would not disappear if any particular segment were eliminated
sunk cost
cost that is irrelevant and should be ignored when making decisions
Differential analysis
focuses on the future costs and benefits that differ between the alternatives. Everything else is irrelevant and should be ignored.
special order decision
involves deciding whether to accept or reject an order that is outside the scope of normal sales
segment margin
is computed by subtracting the traceable fixed costs of a segment from its contribution margin
segment margin
is the best gauge of the long-run profitability of a segment
traceable fixed costs
should be separated from common fixed costs to enable the calculation of a segment margin
split-off point
the point in a manufacturing process where joint products can be recognized as separate products
joint products
two or more products that are produced from a single raw material input (ex: gasoline and jet fuel)
Vertical integration
when a company is involved in more than one activity in the entire value chain
