accounting chapter 8

processing further decision

if company earns ADDITIONAL PROFIT then we will want to PROCESS FURTHER if company is LOSING money then SELL AS IS

key questions needed for special order decisions

- does the company have the excess capacity available to fill special order? - will the reduced sales price be high enough to cover the incremental costs of filling the special order? -will the special order effect long run sales?

special order decisions continued

- first thing youll want to look at is whether or not we will have enough capacity or will the company run into capacity issues when filling the special order -special order will usually be for a price less than regular sales price, so make sure you are connecting the correct selling price when determining extra sales revenue - assumption will be that the company will still incur the same variable cost per unit and no additional fixed costs on special order unless otherwise noted. basic rules of fixed and variable costs apply unless otherwise noted - special order will be ACCEPTED if company is making additional profit from the special order -special order will be REJECTED if company is losing money on order

outsourcing questions

- how do our VC per unit compare to the outsourcing cost per unit? - are any fixed costs avoidable if we outsource? - what could we do with the freed capacity? - what volume of the product do we need?

outsourcing decisions

- look at the total cost for both making and buying and take the difference

with total approach the t-account, MAKE side will have

- total VC to make the unit or part (DM,DL, VOH) - total FC to make the unit or part

BUY side of t- account will have

- total cost to purchase the units or parts - unavoidable fixed costs (these FC are incurred on both the make and buy side) - additional amount earned from freed capacity (this amount will be cash inflow)

product mix with constraints

-a constraint is something that will restrict the amount of product the company can produce and/or -for a manufacturer, the production constraint is often going to be the number of available machine hours - when it comes to selling the product it will be the amount of demand for each one of the company's products - if a company did not have any constraints the company would emphasize the product with the highest contribution margin per unit -if we factor in any constraints faced by the company, we need to emphasize the product with the highest contribution margin per unit of constraint - most of the problems that you will complete will have machine hours as the constraint. some problems will assume "unlimited" demand for the products and some problems will assume we have "limits" on the demand

dropping a segment or product-line

-indirect fixed costs are NOT included in the calculation of direct or segment margin. indirect fixed costs could also be called unavoidable FC, allocated FC, common FC - if direct or segment margin is negative than the company would eliminate that segment or product line. company's overall NOI would increase since they would not be incurring the loss anymore for that specific segment or product line - if direct or segment margin is positive than company would want to keep that segment or product-line unless they are replacing it with another segment or product-line that has a higher direct or segment margin -if company eliminates a segment or product-line that has a positive direct or segment margin than the company's NOI would decrease unless they are replacing it with a more profitable segment or product-line

more product mix with resource constraints

-once you calculate the CM per constraint for each product you will want to rank order them to see which product is the most profitable to produce based on the constraining resource - if you have unlimited demand for all the products then you will produce ONLY the product that has the highest CM per constraint - if we have limits on demand(this is more realistic) then you will begin my producing/selling up to the demand of the most profitable product per constraint and then go to the next most profitable product per constraint until you completely use up the constraining resources

how to solve outsourcing problems

-set up a T-account for the make vs buy decision with one-side of the t-account being the "make costs" and the other side of the t-account being for the "buy or outsourcing costs?

Selling as is or processing further

-some companies have to produce raw material to a point before it is sale-able

dropping a segment or product line

-the key to understanding whether or not a company should drop a segment or product line is knowing how to calculate/understand the "direct or segment margin" for the segment or product-line - in some problems, you may just begin with the contribution- format income statement for the company and the segments/product-lines -if you are given a "traditional or absorption" income statement, you will want to first convert the traditional income statement to the contribution-format income statement

additional profit/loss equation for processing further

add revenue -add costs = add profit/loss

special order (NO excess capacity)

add sales revenue - additional VC = additional CM -additional FC -lost CM from regular units given up =additional profit or loss on special order

additional CM

add units x CM per unit for special order

additional VC

add units x VC per unit for special order

special orders (excess capacity)

additional sales revenue -additional VC = additional CM - additional FC = additional profit or loss on special order

additional sales revenue

additional units x selling price for special order

product mix with resource constraints formula

assume the constraint for the company is the MS's available to produce different products: selling price per unit - variable cost per unit =CM per unit x units per MH = CM per constraint (MH) or selling price per unit -variable cost per unit = CM per unit divided by MH's per unit = CM per constraint (MH)

make or buy "outsourcing decisions"

oursourcing decisions are sometimes called "make or buy" decisions because managers must decide whether to make a product in house or buy from another company

calculation of "direct or segment margin"

sales - VC = contribution margin -direct "avoidable" Fixed costs = direct or segment margin

contribution format income statement

sales -VC = contribution margin -fixed costs -NOI fixed costs include both direct "avoidable" and indirect "unavoidable" fixed costs

decision for outsourcing will be based on

solely difference in total cost to make vs . buy

types of relevant costing

special orders(excess capacity) special orders (no excess capacity) product mix with resource constraints dropping a segment or product line make or buy "outsourcing decisions" selling as is or processing further

special order decisions

usually a special order decision occurs when a customer requests a one-time order at a REDUCED sales price