Managerial Accounting: Decision Making & Relevant Information

Covers:Decision Making & Relevant Information
Make Or Buy DecisionsSpecial Order ConsiderationsContinue/Discontinues A Business SegmentProduct Mix Decision Under A Single Constraint
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What is relevant cost or revenue?
A cost or revenue that differs between alternatives.
The objective of Make of Buy Decisions
To find the alternative that is least costly
Other things to consider with Make or Buy Decisions
The quality of the part/service, your reputation and the reliability.
The Solution strategy for Make or Buy Decisions
Compare the relevant costs of making or buying the products. Non-relevant item's need not be taken into account.
Format: Make Buy Relevant Costs of ea. --> Yes No
Unavoidable fixed Yes Yescost, e.g. Bldg./Equip.- Depreciation.(there regardlesstherefore a non-relevant item)
What is a special order?
A one-time sale at a reduced price.
The objective of Special Order Considerations.
To maximize our income. Compare Incremental revenue vs. incremental costs.
Other considerations for Special Orders.
Do I have enough capacity? It should not impact the regular business.
The solution strategy for Special Order Considerations.
Work the problem on a per unit basis, if it is possible/practical. Otherwise use total costs.Format:Incremental Revenue xx
Incremental Costs: xxNet Profit per unit xxX # of units xx=incremental profit xx
The objective of Continuing/Discontinuing a Business Segment
To maximize the company's income by retaining business segments with positive segmental margin.
Segmental Margin is?
revenue minus variable and avoidable costs for the business segment.
Other considerations for Continue/Discontinue a Business Segment
Beware of losing sales in other departments.
The solution strategy for Continue/Discontinue a Business Segment.
Total A B C Sales xx xx xx xxAvoidable Costs: -Variable Costs <xx> <xx> <xx> <xx> =CoMo xx xx xx xx -Avoidable Fixed <xx> <xx> <xx> <xx> =Seg. Margin xx xx xx xx -Unavoidable Costs <xx> | No Further | =Operatng come xx | Amounts | ====
The objective of Product Mix Decisions under a single constraint.
To maximize the benefit/opportunity of the limited/scarce resource, i.e. production time, labor hours, machine hours.
Other Considerations?
Solution Strategy
Find the contribution margin per unit of the scarce resource for each of the different items you can produce.
Then use this format to allocate the units of scarce resource to each item you can produce.
*Data and numbers are not relevantThe maximum amount of units an item can use is 1000The CoMo/unit is A:2, B:3, C:1 A B C Total Total Hrs. Available 2500-Item w/ highest CoMo/unit 1000 <1000>Remaining Units 1500-Item w/ 2nd highest CoMo/unit 1000 <1000>Remaining Units 500-Item w/ 3rd highest CoMo/unit 500 <500>Remaining Units 0x CoMo/unit. 2 3 1 Contribution Generated 2000 3000 500 Total Contribution 5500

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