Management Decision-Making Process and Incremental Analysis
Controllable margin
Contribution margin minus controllable fixed costs
Direct labor
Cost of labor used in production
Direct materials
Cost of materials used in production
Purchase price
Cost of purchasing externally
Joint costs
Costs incurred before products are separately identifiable
Relevant costs
Costs that differ across alternatives and should be considered
Opportunity costs in make or buy decision
Additional costs or savings from choosing to make or buy
New fixed costs or other
Additional fixed costs or other expenses from accepting a special order
New revenue from offer price
Additional revenue from accepting a special order
New variable costs
Additional variable costs from accepting a special order
Sunk costs
Costs that have already been incurred and won't change
Accept order at special price
Deciding whether to accept an order at a lower price
Eliminate unprofitable segment or product
Deciding whether to discontinue an unprofitable part of the business
Sell or process materials further
Deciding whether to sell unfinished products or process them further
Types of decisions
Accepting special orders, make or buy, sell or process further
Replace equipment
Buying new equipment to replace existing
Make or buy decision
Choosing between producing internally or outsourcing
Repair, retain, or replace equipment
Choosing whether to keep old equipment or buy new
Financial and nonfinancial factors
Factors that can impact decision-making
Process unfinished tables further
Finishing tables and selling them at a higher price
Fixed overhead
Fixed costs not directly tied to materials or labor
Repair equipment
Fixing existing equipment
Decision-making process steps
Identify, evaluate, decide, review, and modify
Incremental analysis
Process to identify financial data that change under different options
Retain equipment
Keeping existing equipment
Opportunity costs
Lost benefit from choosing one alternative over another
Joint products
Multiple end-products from a single raw material and production process
Net earnings from special offer
Net income from accepting a special order
Buy
Outsourcing or purchasing externally
Unprofitable segment
Part of the business that is not generating profit
Make
Producing internally
Sell unfinished tables
Selling tables without further processing
Management's decision-making process
Steps to identify, evaluate, and make decisions
Capacity
The number of units a company can produce
Net income
Total revenue minus total costs
Cost concepts
Understanding relevant costs, opportunity costs, and sunk costs
Incremental analysis approach
Using incremental changes in financial data for decision-making
Variable overhead
Variable costs not directly tied to materials or labor