Cost Accounting Chapter 12
Utilization of contained resources
-Fixed costs are usually unaffected in these situations, so the product mix that maximizes the company's total contribution margin should ordinarily be selected. -A company should not necessarily promote those products that have the highest unit contribution margins. -Rather, total contribution margin will be maximized by promoting those products or accepting those orders that provide the highest contribution margin in relation to the constraining resource.
Why would you keep a segment when it is showing a loss?
B/c of the way they allocate common fixed costs -including unavoidable common fixed costs makes the product line appear to be unprofitable
Joint costs
In some industries, a number of end products are produced from a single raw material input.
value of a constrained resource
Increasing the capacity of a constrained resource should lead to increased production and sales.
sell or process further
-Joint costs are irrelevant in decisions regarding what to do with a product from the split-off point forward. Therefore, these costs should not be allocated to end products for decision-making purposes. -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.
ways to increase the capacity of a bottleneck
1) investing in additional machines @ bottleneck 2) shifting workers from processes that aren't bottlenecks to the process that is the bottleneck
2 categories of costs that are never relevant:
1) sunk costs 2) future cost that does not differ b/w alternatives
Decision making (using differential costs): A 2-step process
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.
Using differential approach is desirable for 2 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.
If dropping a product line enables a company to avoid more in ____ costs than it loses in CM, then its overall net operating income would improve by eliminating the product line
Fixed
bottleneck
The machine or process that is limiting overall output
split-off point
The point in the manufacturing process where each joint product can be recognized as a separate product
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.
contraint
When a limited resource of some type restricts the company's ability to satisfy demand
Relevant benefit
a benefit that differs b/w alternatives
avoidable cost
a cost that can be eliminated, in whole or in part, by choosing one alternative over another they are relevant costs unavoidable costs are irrelevant costs
Relevant cost
a cost that differs b/w alternatives
make or buy 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
when analyzing a special order, only the _____ are relevant
incremental cost and benefits
If no resolve value, depreciation is a sunk cost and therefore....
irrelevant to the decision
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 the bottleneck
Two or more products produced from a common input are called ____
joint products
How to determine if you should add or drop segments?
need to find the impact the decision will have on net operating income
what costs should be included in the analysis when making a decision?
relevant, differential, opportunity, and avoidable costs
sell or process further formula
sale value after further processing -sale value of split off point =incremental revenue -cost of further processing =Profit (loss) from further processing
deciding what to do w/ a joint product at the split-off point is a
sell or process further decision
opportunity cost
the benefit that is foregone as a result of pursuing some course of action