Managerial Accounting: Decision Making & Relevant Information

15 cards

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?
 
None.
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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