Ch 12 Managerial accounting
To find the max contribution margin a company can earn given the limited quantity of RM:
# of units produced
Compute markup percentage on absorption cost:
(required roi X investment) + S&AEpx ----------------------------------------- divide this by # unit sales X unit production cost
Benefits of outsourcing:
-Buy expertise -Lower costs -Focus on core competencies
primary considerations for volume trade off decisions
-Is there a constraint that prevents us from making all the units that we can sell? -Is there a constraint that prevents us from selling all of the units we can make? -Will the product mix affect fixed costs?
Types of services that can be outsourced:
-Legal work -HR -Call center -Marketing -Accounting-Collections -EVERYTHING!
Drawbacks of outsourcing:
-Loss of control (scheduling, timing, quality) -Need for dedicated staff to manage relationships
2 rules whenever making business decisions:
1.Be careful about using unit cost data, unless it is purely a variable cost per unit. Average cost per unit is usually based on absorption costing, which includes F.MOH, so it changes as volume changes. 2.Analyze variable costs and fixed costs separately Because they behave differently
What are the six (6)decisions we will look at:
1.Dropping/Adding Product Lines, Departments, or Segments 2.Make or Buy decisions (Outsourcing decisions) 3.Special Order decisions 4.Volume Trade-Off decisions (Allocating Constrained Resources) 5.Sell or Process Further decisions 6.Pricing decisions
Sell or Process Further Decisions
A decision as to whether a joint product should be sold at the split-off point or sold after further processing.
Financial advantage vs disadvantage when pursuing opportunity will decrease sales by ___ #:
A. additional units of offer X $ amount per unit B. find total incremental variable cost C. find forgone sales to reg customers by (original selling priceX # of units) Then subtract A-B-C to find adv. vs disadv.
Contribution margin lost
CM X New normal production per year
Segment margin:
CM- Direct (avoidable) fixed costs
Absorption Costing
DM + DL + VMOH + FMOH
Pounds of raw material per unit
DM cost per unit/ cost per lb DM
Variable Costing
DM+DL+VMOH
special order decisions primary considerations include:
Does the company have excess capacity? Is the reduced price high enough to cover variable costs and any additional fixed costs related to the order?
In deciding whether to sell a product or process it further, the primary considerations are:
How much additional or incremental revenue will be generated by processing further? How much additional or incremental costs will be incurred by processing further?
When do we accept vs not accept special order
If additional revenues> additional cost= ACCEPT If additional revenues< additional cost=DONT accept
To find financial advantage/ disadvantage of accepting the new customers order:
In column multiply additional units of offer times $ amount per unit. In another column take (dm, dl, voh, vsexp) all variable costs and X each one by the additional units of offer. Add those 4 numbers up & compare the two amounts to figure it out if its an advantage or disadvantage
Do we ever need to worry about fixed costs be affected?
In most cases, changing the product mix in the short run will not affect fixed costs.
target costing
In target costing the firm has no control over the price. They are the price-taker. Target cost= Revenue at market price-Profit
Make vs. Buy
Make: Dm+Dl+VMOH Buy: ?# Compare difference if buy is a larger number it will be better to make product bc it will be cheaper per unit
What are the revenues and costs that impact a decision?
Relevant revenues (or relevant benefits) and relevant costs
Contribution margin
Sales price per unit- variable exp per unit (dm, dl,vmoh,vsexp)
Why are pricing decisions different than special orders?
Special orders are one-time deals. What we are talking about now is how to set prices for our regular, everyday customers. There are two different pricing approaches: target costing and cost-plus pricing.
price takers (characteristics)
Targert costing competitive generic products/commodities like wheat,corn
cost-plus pricing
The firm has control over the price. Price-setter Price=cost+profit (profit should be expressed as a return or investment)
optimal product mix
The product mix that will result in the most profit for the company (assuming that the company can sell every item it produces) -every day -custom -special occasion
Companies that produce multiple products will often have to make
Volume trade off decisions
Avoidable Cost:
a cost that can be eliminated by choosing one alternative over another. Avoidable costs are relevant when making decisions. VARIABLE COSTS
Sunk Cost:
a cost that has already been incurred and cannot be changed. Sunk costs are NOT relevant when making decisions.
Unavoidable Costs:
a cost that is incurred regardless of the alternative chosen. Unavoidable costs are NOT relevant when making decisions. FIXED COSTS
Decision making is
a difficult task that is complicated by having several alternatives to choose from and massive amounts of data available. Perhaps one of the most important responsibilities of managers is to make sound business decisions.
Differential Cost:
a future cost that differs between alternatives. Differential costs are relevant when making decisions.
Differential Revenue:
a future revenue that differs between alternatives. Differential revenues are relevant when making decisions.
Joint Costs
all costs incurred up until the split-off point.
Constraint
anything that limits a company's ability to produce products (or provide services). Examples include machine hours, labor hours, and facilities.
total amount of common fixed expenses=
common fixed expenses X sales volume (if there is two common fixed expenses add them first then X by sales unit)
if the segment negative
ditch it
cost plus pricing
favorable reputation
The key to decision making is to
focus on the info that matters (the relevant info)
Make or buy decisions (also referred to as outsourcing decisions):
involve deciding whether to manufacture a good (or performa service) within the company or to have someone else do it. There are several pros and cons to outsourcing
In order for info to be relevant two things must both be true:
it must be an expected FUTURE revenue or cost and it must differ between the alternatives
If the segment margin is positive
keep it
Relevant information can be both
quantitative and qualitative.
Special Order Decisions
relevant costing analyses that focus on whether a specially priced order should be accepted or rejected
Incremental Cost:
the additional cost of one alternative over another. Incremental costs are relevant when making decisions.
Incremental Revenue:
the additional revenue generated by one alternative over another. Incremental revenues are relevant when making decisions.
Bottleneck
the most constrained resource that limits a business' ability to produce products (or provide services).
Split-off Point
the point in the manufacturing process where joint products can be recognized as separate products.
opportunity cost:
the potential benefit forgone by choosing one alternative over another. Opportunity costs are relevant when making decisions.
With special order decisions, what does a customer (or potential customer) offer?
to purchase a large quantity of the company's product but wants to pay an amount less than the regular sales price. The company must decide whether to accept or reject the special order.
Goal of volume trade off decisions
to understand the constraints that prevent companies from being able to produce all of the products their customers demand and to determine a product mix that will maximize profit given the constraints the company faces.
Total amount of traceable fixed MOH=
traceable OH per unit X sales volume (sales volume=capacity to produce # of units)
Joint Products
two or more products produced from a single production process.
to find selling price per unit:
unit product cost + markup (previous % X unit product cost)
when do companies make volume trade off decisions
when they do not have enough capacity to produce all of the products to meet the demand of their customers.
In decisions involving dropping and adding product lines, departments, or segments, a company is trying to decide
whether or not to eliminate a product line or segment of the company that may not appear to be performing well and perhaps adding a new product line or segment in its place.
In some industries, two or more products are sometimes produced from a single manufacturing process. These companies must decide
whether to sell the product "as is" or to process the product further and then sell it.
