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The analysis of alternatives should include only revenues and expenses that differ between alternatives.
Costs that change as a result of making a decision.
The rate of Return you could earn on an alternative investment of similar risk.
Can be avoided by undertaking a course of action.
Cost from a previous committment and can't be recovered.
cost that behaves like a combination of fixed and variable costs
Cost of next unit in production.
Relevant costing is also called _______.
_______ costs are not relevant.
variable costs, fixed, change
The only relevant costs are _______ and _______ costs that _______.
Central, Functional and Internal.
A restriction that occurs when the capacity to manufacture a product or to provide a service is limited in some manner.
Short-term decisions to outsource labor or to purchase components used in manufacturing from another company rather than to provide services or produce components internally.
Resource utilization decision
A decision requiring an analysis of how best to use a resource that is available in limited supply.
Short-run pricing decisions in which management must decide which sales price is appropriate when customers place orders that are different from those placed in the regular course of business (one time sale to a foreign customer, etc.).
A management tool for dealing with constraints; identifies and focuses on bottlenecks in the production process.
Accomplished when a company is involved in multiple steps of the value chain.
T or F: Depreciation is a relevant cost.
False, depreciation is a sunk cost because it is tied to the past.
Costs that differ among alternatives are costs that can be avoided or eliminated by choosing one alternative over another. These are _______ costs.
what else could you do with the money.
T or F: Doing nothing is an opportunity cost.
Special orders are almost never accepted if a company does not have excess capacity, because current customers may have to be turned away. Even when excess capacity exists and a special order is profitable, companies must consider _______.
Compare variable costs to purchase price.
How to analyze a Make or Buy Decision
How to analyze a Keep or Drop Decision
Use Keep as Option 1. Subtract the change in variable costs from the change in revenue to get Differential Net Income. If DNI is still positive, Keep the product because fixed costs will transfe…
(Processed Price - Unfinished Price)
How to analyze a Sell or Process Further Decision
REMEMBER: If the old asset is sold or traded, that counts as revenue for the replacement AND the replacement has cost to purchase and operate.
The value chain of org is simply the set of activities that increase the value of a an org's products and services. Vertical integration is accomplished when a company is involved in multiple step…
What are important qualitative factors to consider when making a Keep or Drop decision?
Companion products (lady's shoes and lady's dresses) and customer's perceptions of the company's intentions.
CONTROL, especially regarding timely delivery and quality.
What are important qualitative factors to consider when making an Outsourcing decision (Make or Buy)?
What are important qualitative factors to consider when making a Special Order decision?
How will current customers react if they find out about special price? Will current customers leave?
Why might a company choose to bid a Special Order At Cost?
charity, win a new customer, training /practice on a new product or procedure...
T or F: Resource Utilization decisions are typically short-term decisions.
True. Once the constraint is identified, management can focus on solving it.
Sunk costs are not relevant as the cost has already been incurred.
make-or-buy (or outsourcing decision)
a decision as to whether a product or service should be produced in-house or purchased from an outside supplier
expenses that will no longer be incurred if a particular action is taken
expenses that will continue to be incurred even if a subunit or activity is eliminated
Drop a segment or retain it?
IF its avoidable fixed costs exceed its contribution margin; or if segment margin is negative
Make or buy this component part?
Choose the alternative that has the greatest net incremental revenues over incremental costs
If its incremental revenue exceeds the incremental expense of producing it
How much of a constrained resource to be used for each product?
Emphasize the products with the greatest contribution margin per unit of constrained resource
Continue to process Joint products after the split-off point
If the incremental revenue after further processing exceeds the incremental costs of more processing
Incremental costs, differential costs, marginal costs
Only the relevant costs are considered and these are the costs that make a difference, can be avoided, can be eliminated
ALL the revenue and costs are displayed in the income statement, then the difference in NOI between the two alternatives is compared
When a company is involved in more than one activity in the value chain, it is called
A decision to carry out one of the activities in the value chain internally, rather than buy externally from a supplier
An operation where the work required to be performed approaches or exceeds the available capacity.
Relevant information to a decision when
Relevant costs and relevant revenues
The relevant information input for decision making are future cash flows that differ between the competing alternatives
Short term selling decisions
Organizations often face competing demands for their limited production resources
decision to drop a product
Relevant cost analysis involves comparing the costs saved by abandoning the product with revenues forgone