Chapter 11

• Management accountant role

  Supply information on changes in cost and revenues to facilitate decision process
• Relevant information

  Expected future data in differ among alternative course of action
• In decision making, REVENUE and COST often key factors
• Decision Making 


  Process of studying and evaluating two or more available alternative leading to final choice
• Selection process not automatic, it is a Conscious procedure
• Avoidable cost

  Cost that can be eliminated as result of choosing one alternative over another
• All cost are considered avoidable except:

  • Sunk Cost
  • Future Cost do not differ between alternatives at hand
• Relevant Cost

  Expected future Cost differ between decision alternatives.
• Under Relevant cost analytical steps in decision making

  1. Determine all cost associated with each alternative being considered
  2. Drop those cost that sunk or historical
  3. Drop those cost do not differ between alternatives
  4. Make a decision based on remain cost
• Sunk or Historical Cost

  Never relevant in decisions as they are not avoidable and must be eliminated from manager framework
• Opportunity cost

  Profit lost by the diversion of an input factors from use to another. Net economic benefits given up when alternative is REJECTED
• Out of Pocket Cost

  either an intermediate or near future cash outlay, usually relevant to decisions
• Out of pocket cost

  Important as it determine whether a proposed project would at minimum return is initial cash outlay
• Two common approached in evaluating alternative cost

  1. Incremental or Differential analysis approach
  2. Total Project analysis approach
• Incremental, Differential or Relevant Cost

  Comparing differential revenues, cost and contributions. It shows only relevant amount.
• Total Project Analysis


  All items of revenue and Cost data under different alternatives and compares net income result
• TYPE OF DECISIONS

  1. Make or Buy
  2. Add or Drop product/ segment
  3. Sell now or Process further
  4. Special Sales Pricing
  5. Utilization of Scarce Resources
  6. Shut down or Continue Operations
  7. Pricing
• Make or Buy Decisions 


  Management decision about whether an item should be made internally or brought from an outside supplier
• Make or buy decisions 


  Managers often ask to compare cost of manufacturing with the cost of purchasing it
• Adding or Dropping Product/ Segment


  It occurs due to customer changes in preference where products become obsolete are dropped some are developed to replaced them
• Adding or Dropping Product/ Segments 


  Management consider only the relavant cost that company would avoid by dropping product or customer
• Adding or Dropping Product/ Segments 


  Important factors is the decision effect on operating income
• Sell now or Process Further 


  Number of end products are produced from a single common raw material input
• Joint Product Cost


  Manufacturing cost that are incurring in producing joint Product up to splint off point
• Split off Point 


  Process in manufacturing which product can be recognized as separate products
• Seperable Cost


  After split off point for the benefit of only one particular product that is relevant cost
• Sell or Process further decision

  To be profitable continue processing joint Product after split off until INCREMENTAL REVENUE EXCEEDS INCREMENTAL PROCESSING COST
• Special Sales Pricing Decision 


  Manager evaluate whether a special order to be accepted or if accepted, what price should be charged
• Special Order 


  One time order not considered a apart or company ongoing business. Only occur to make use of excess or idle facilities
• Utilization of Scarce Resources 


  Chosing product to manufacture and sell is managerial decision, this is where problem on deciding how scarces are going to be utilized.
• Utilization of Scarce Resources flow

  As capacity pressed due to scarce of resources - constraints - cannot fully satisfy demand.
• Utilization of Scarce Resources flow

  Fixed cost are unaffected but it should maximize the cost margin contribution 


  Assumption: Short run, capacity is fixed while in Long run, capacity can be changed
• Constraints 


  Limited availability of raw materials, direct labor, capital available for investment etc.
• Linear Programming 


  An optimal combination of product mix found by quantitative method
• SHUTDOWN OR CONTINUE OPERATIONS 


  incur if their is further drop to the sales volume lead to creating loss
• SHUTDOWN OR CONTINUE OPERATIONS 



  Manager create a recommendation that operations be suspended until favorable conditions attained and better selling price is set
• SHUTDOWN OR CONTINUE OPERATIONS 


  Continue Operations - If expected demand exceed shut down point

  Shut down temporarily - Expected demand is less than shut down point
• PRICING PRODUCT AND SERVICES

  no price calculations necessary because every firm charges whatever is prevailing to market price
• PRICING PRODUCTS AND SERVICES

  selling own prices is critical because:

  1. Price largely determine quantities customer willing to purchase
  2. High enough to cover all cost of firm
• COST PLUS PRICING 


  Most basic approach where price should cover all the cost that are traceable to product/service variable as well as fixed