Managerial Accounting Exam Chapter 12

Cost that can be eliminated, in whole or in part, by choosing one alternative over another. They are relevant costs.

Avoidable Cost

Relevant Costs

Avoidable Cost

When analyzing a special order, only the __________ ________ and __________ are relevant. Since the existing fixed manufacturing overhead costs would not be affected by the order, they are not relevant

Incremental costs and benefits

Two or more products produced from a common input are called

Joint Products

When a company is involved in more than one activity in the entire value chain, it is vertically integrated. A decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier is called a

Make or Buy Decision

Allocated joint product costs are

NOT RELEVANT

Joint Costs True or False In some industries, a number of end products are produced from a single raw material input?

True

Pitfalls of allocation, just don't do it, not relevant to decision because it does not go away True or False

True

Sell or Process Further Joint costs are irrelevant in decisions regarding what to do with a product from the split off point forward. Therefor, these costs should not be allocated to end products for decision making purposes

True

True or False Costs that are relevant in one decision situation may not be relevant in another context. Thus, in each decision situation, the manager must examine the data at hand and isolate the relevant costs.

True

True or False One of the most important decisions managers make is whether to add or drop a business segment. Ultimately, a decision to drop an old segment or add a new one is going to hinge primarily on the impact the decision will have on net operating income - to assess this impact, it is necessary to carefully analyze the costs

True

Identifying Relevant Costs, what two things are important?

1. Differ between alternatives (cost or benefit) "will it change" 2. Does it occur in the future

Decision Making: A Two Step Process What are the 2 steps?

1. Eliminate costs and benefits that do not differ between alternatives 2. Use the remaining costs and benefits that differ between alternatives in making the decision. The costs that remain are the differential, or avoidable, costs.

What are the two scenarios?

1. Infinite demand for any products - put it all in whats making the most money 2. Not infinite demand - make everything you can sell

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

Two broad categories of costs are never relevant in any decision. They include:

1. Sunk Costs 2. A future cost that does not differ between the alternatives

Ex: Cynthia, a Boston student, is considering visiting her friend in New York. She can drive or take the train. By car, it is 230 miles to her friend's apartment. She is trying to decide which alternative is less expensive and has gathered the following information. Which costs and benefits are relevant in Cynthia's decision?

1. The cost of the car is a sunk cost and is not relevant to the current decision 2. The annual cost of insurance is not relevant. It will remain the same if she drives or takes the train. However, the cost of gasoline is clearly relevant if she decided to drive. If she takes the train, the cost would not be incurred, so it varies depending on the decision. 1. The cost of maintenance and repairs is relevant. In the long run, these costs depend upon miles drives 2. The monthly school parking fee is not relevant because it must be paid if cynthia drives or takes the train At this point, we can see that some of the average cost of .619 per mile are relevant and others are not

Managing Constraints It is often possible for a manager to increase the capacity of a bottleneck, which is called relaxing (or elevating) the constraint in numerous ways such as:

1. Working overtime on the bottleneck 2. Subcontracting some of the processing that would be done at the bottleneck 3. Investing in additional machines at the bottleneck 4. Shifting workers from non bottleneck processes to the bottleneck 5. Focusing business process improvement efforts on the bottleneck 6. Reducing defective units processed through bottleneck

Vertical Integration Disadvantage

Companies may fail to take advantage of suppliers who can create economies of scale advantage by pooling demand from numerous companies 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

Are not actual cash outlays and are not recorded in the formal accounts of an organization

Opportunity Costs

Is the benefit that is foregone as a result of pursuing some course of action

Opportunity Costs

Benefit that differs between alternatives

Relative Benefit

Cost that differs between alternatives

Relevant Cost

Happens in the next month of maybe 2 months, all FC are irrelevant

Special Order

One time order that is not considered part of the company's normal ongoing business

Special Order

Utilization of a Constrained Resource Fixed Costs are usually unaffected in these situations, so the product mix that maximizes the company's total CM should be ordinarily selected A company should not necessarily promote those products that have the highest unit CM's Rather, total CM will be maximized by promoting those products or accepting those orders that provide the highest CM in relation to the constraining resource

True

Irrelevant Costs

Unavoidable Cost

the machine or process that is limiting overall output is called the __________ it is the constraint

bottleneck

When a limited resource of some type restricts the company's ability to satisfy demand, the company is said to have a

constraint

Sell or Process Further With respect to sell or process further decisions, it is profitable to continue processing a joint product after the split off point so long as the

incremental revenue from such processing exceeds the incremental processing costs incurred after the split off point

The point in the manufacturing process where each join product can be recognized as a separate product is called the

split off point