ch8 relevant cost and decision making.ppt

1、,Evaluation Measures,Evaluation of Responsibility Centers Performance,Responsibility Centers,Relevant Costs for Decision Making,Chapter 8,Resource Allocation Decisions,Accounting information can improve, but not perfect, managements understanding of the consequences of resource allocation decisions.

2、 To the extent that this information can reduce managements uncertainty about the economic facts, outcomes, and relationships involved in various courses of action, the information is valuable for decision making purposes and necessary for conducting business. Many decisions are made on the basis of

3、 incremental analysis. Such analysis encompasses the concept of relevant costing, which allows managers to focus on pertinent facts and disregard extraneous information. This chapter illustrates the use of relevant costing in decisions about making or buying a product part, allocating scarce resourc

4、es, and determining the appropriate sales or production mix. While these decisions are often viewed by managers as short-run, each decision also has significant long-run implications that must be considered., 2007 by Nelson, a division of Thomson Canada Limited.,Relevance and Relevant Costing,Releva

5、nt cost a cost that is pertinent to, or logically associated with, a specific problem or decision and that differs between or among alternatives Relevant costing a process that allows managers to focus on pertinent facts and disregard extraneous information by comparing, to the extent possible and p

6、ractical, the differential, incremental revenues and costs of alternate decisions Differential the different costs between or among the choices Incremental revenue the additional revenue resulting from a contemplated sale of a quantity of output Incremental cost the additional cost of producing or s

7、elling a contemplated additional quantity of output, 2007 by Nelson, a division of Thomson Canada Limited.,Relevance and Relevant Costing,General rules for short-term decision making 1. most variable costs are relevant 2. most fixed costs are not relevant There are exceptions, for example, the cost

8、of buying a new machine is an incremental fixed cost relevant to the decision to produce a new product line, or expand beyond the relevant range., 2007 by Nelson, a division of Thomson Canada Limited.,例如，某出版社出版一本工具书，若其正常生产能力的相关范围为10,00015,000册，在这相关范围内该书的单位变动成本为4元，固定成本总额为10,000元。如超过 15,00020,000册，单位变

9、动成本将增至4.10元，固定成本总额将增至11,000元。现以1,000册为基础，计算每增加1,000册的差量成本。,Cost Concepts for Decision Making,A relevant cost is a cost that differs between alternatives.,1,2, 2007 by Nelson, a division of Thomson Canada Limited.,Relevance and Relevant Costing,Some relevant costs are easily identified those factors

10、which are integral parts of the accounting system. Examples are direct labour, direct material, commissions. Other relevant costs are not recorded in the accounting system, for example, an opportunity cost.,Identifying Relevant Costs,Costs that can be eliminated (in whole or in part) by choosing one

11、 alternative over another are avoidable costs. Avoidable costs are relevant costs. Unavoidable costs are never relevant and include: Sunk costs. Future costs that do not differ between the alternatives.,Sunk cost,the historical or past cost that is associated with the acquisition of an asset or a re

12、source. A sunk cost is not relevant. It is not a cost which will be incurred in the future. It has already been incurred.,Opportunity Cost,The benefits that are foregone as a result of pursuing some course of action. Opportunity costs are not actual dollar outlays and are not recorded in the formal

13、accounts of an organization.,Quick Check ,Which of the following are opportunity costs of attending the university? a. Tuition. b. Books. c. Lost wages. d. Not enough time for other interests.,Which of the following are opportunity costs of attending the university? a. Tuition. b. Books. c. Lost wag

14、es. d. Not enough time for other interests.,Quick Check ,Opportunity costs do not have to involve money.,Identifying Relevant Costs,Cynthia, a Boston student, is considering visiting her friend in New York. She can drive or take the train. By car it is 230 miles to her friends apartment. She is tryi

15、ng to decide which alternative is less expensive and has gathered the following information:,$18,000 cost $4,000 salvage value 5 years,Identifying Relevant Costs,Identifying Relevant Costs,Which costs and benefits are relevant in Cynthias decision?,The cost of the car is a sunk cost and is not relev

16、ant to the current decision.,However, the cost of gasoline is clearly relevant if she decides to drive. If she takes the drive the cost would now be incurred, so it varies depending on the decision.,The annual cost of insurance is not relevant. It will remain the same if she drives or takes the trai

17、n.,Identifying Relevant Costs,Which costs and benefits are relevant in Cynthias decision?,The cost of maintenance and repairs is relevant. In the long-run these costs depend upon miles driven.,The monthly school parking fee is not relevant because it must be paid if Cynthia drives or takes the train

18、.,At this point, we can see that some of the average cost of $0.569 per mile are relevant and others are not.,Identifying Relevant Costs,Which costs and benefits are relevant in Cynthias decision?,The decline in resale value due to additional miles is a relevant cost.,The round-trip train fare is cl

19、early relevant. If she drives the cost can be avoided.,Relaxing on the train is relevant even though it is difficult to assign a dollar value to the benefit.,The kennel cost is not relevant because Cynthia will incur the cost if she drives or takes the train.,Identifying Relevant Costs,Which costs a

20、nd benefits are relevant in Cynthias decision?,The cost of parking is relevant because it can be avoided if she takes the train.,The benefits of having a car in New York and the problems of finding a parking space are both relevant but are difficult to assign a dollar amount.,Identifying Relevant Co

21、sts,From a financial standpoint, Cynthia would be better off taking the train to visit her friend. Some of the non-financial factor may influence her final decision.,Note,Do not underestimate the importance and power of the relevant cost idea. Most costs (and benefits) do not differ between alternat

22、ives. This allows you to focus on the few things that matter. This principle also helps avoid mistakes.,Total and Differential Cost Approaches,The management of a company is considering a new laborsaving machine that rents for $3,000 per year. Data about the companys annual sales and costs with and

23、without the new machine are:,Total and Differential Cost Approaches,As you see, the only costs that differ between the alternatives are the direct labor costs savings and the increase in fixed rental costs.,We can efficiently analyze the decision bylooking at the different costs and revenues andarri

24、ve at the same solution., 2007 by Nelson, a division of Thomson Canada Limited.,Special Order Pricing,Special order pricing determining a sales price to charge for manufacturing or service jobs that are outside the companys normal production or service realm Special order situations include jobs tha

25、t require a bid, are taken during slack periods, or are manufactured to a particular buyers specifications., 2007 by Nelson, a division of Thomson Canada Limited.,Special Order Pricing,Jack Abbott Corporation, a company which manufactures sneakers. The company has enough idle capacity available to a

26、ccept a special order of 20,000 pairs of sneakers at $6.00 per pair from Brad Carlton Company. The normal selling price is $10.00 a pair. Variable manufacturing costs are $4.50 per pair, and fixed manufacturing costs are $1.50 per pair. Abbott will not incur any selling expenses as a result of the s

27、pecial order. What would be the effect on operating income if the special order could be accepted without affecting normal sales?, 2007 by Nelson, a division of Thomson Canada Limited.,Incremental sales (20,000 $6.00)$120,000 Incremental costs (20,000 $4.50) 90,000 Incremental Income $ 30,000,Specia

28、l Order Pricing,Special Orders,Jet, Inc. makes a single product whose normal selling price is $20 per unit. A foreign distributor offers to purchase 3,000 units for $10 per unit. This is a one-time order that would not affect the companys regular business. Annual capacity is 10,000 units, but Jet, I

29、nc. is currently producing and selling only 5,000 units.,Should Jet accept the offer?,Special Orders,Special Orders,If Jet accepts the offer, net operating income will increase by $6,000.,Note: This answer assumes that fixed costs are unaffected by the order and that variable marketing costs must be

30、 incurred on the special order.,Quick Check ,Northern Optical ordinarily sells the X-lens for $50. The variable production cost is $10, the fixed production cost is $18 per unit, and the variable selling cost is $1. A customer has requested a special order for 10,000 units of the X-lens to be imprin

31、ted with the customers logo. This special order would not involve any selling costs, but Northern Optical would have to purchase an imprinting machine for $50,000. (see the next page),Quick Check ,What is the rock bottom minimum price below which Northern Optical should not go in its negotiations wi

32、th the customer? In other words, below what price would Northern Optical actually be losing money on the sale? There is ample idle capacity to fulfill the order. a. $50 b. $10 c. $15 d. $29,What is the rock bottom minimum price below which Northern Optical should not go in its negotiations with the

33、customer? In other words, below what price would Northern Optical actually be losing money on the sale? There is ample idle capacity to fulfill the order. a. $50 b. $10 c. $15 d. $29,Quick Check ,Variable production cost $100,000 Additional fixed cost 50,000 Total relevant cost$150,000 Number of uni

34、ts 10,000 Average cost per unit $15,Decision rule,Sales price should be high enough to cover the variable costs of the job and any incremental (additional) fixed costs caused by the job, and to generate a profit.,Notes,Management also should consider the effect that the special order will have on al

35、l company activities (purchasing, receiving, warehousing, etc.) and whether these activities will create additional, unforeseen costs. When setting a special order price, management must consider the qualitative issues as well as the quantitative ones, for example, will the special price set a prece

36、dent for this or other customers.,Adding/Dropping Segments,One of the most important decisions managers make is whether to add or drop a business segment such as a product or a store. Lets see how relevant costs should be used in this decision.,Adding/Dropping Segments,Due to the declining popularit

37、y of digital watches, Lovell Companys digital watch line has not reported a profit for several years. An income statement for last year is shown on the next screen.,Adding/Dropping Segments,Adding/Dropping Segments,Investigation has revealed that total fixed general factory overhead and general admi

38、nistrative expenses would not be affected if the digital watch line is dropped. The fixed general factory overhead and general administrative expenses assigned to this product would be reallocated to other product lines.,Adding/Dropping Segments,The equipment used to manufacture digital watches has

39、no resale value or alternative use.,Should Lovell retain or drop the digital watch segment?,A Contribution Margin Approach,DECISION RULE Lovell should drop the digital watch segment only if its profit would increase. This would only happen if the fixed cost savings exceed the lost contribution margi

40、n. Lets look at this solution.,A Contribution Margin Approach,Comparative Income Approach,The Lovell solution can also be obtained by preparing comparative income statements showing results with and without the digital watch segment. Lets look at this second approach.,If the digital watch line is dr

41、opped, the company gives up its contribution margin.,On the other hand, the general factory overhead would be the same. So this cost really isnt relevant.,But we wouldnt need a manager for the product line anymore.,If the digital watch line is dropped, the net book value of the equipment would be wr

42、itten off. The depreciation that would have been taken will flow through the income statement as a loss instead.,Beware of Allocated Fixed Costs,Why should we keep the digital watch segment when its showing a loss?,Beware of Allocated Fixed Costs,The answer lies in the way we allocate common fixed c

43、osts to our products.,Beware of Allocated Fixed Costs,Our allocations can make a segment look less profitable than it really is.,Utilization of a Constrained Resource,Firms often face the problem of deciding how to best utilize a constrained resource. Usually fixed costs are not affected by this par

44、ticular decision, so management can focus on maximizing total contribution margin. Lets look at the Ensign Company example.,Utilization of a Constrained Resource,Ensign Company produces two products and selected data is shown below:,Utilization of a Constrained Resource,Machine A1 is the constrained

45、 resource and is being used at 100% of its capacity. There is excess capacity on all other machines. Machine A1 has a capacity of 2,400 minutes per week. Should Ensign focus its efforts on Product 1 or 2?,Quick Check ,How many units of each product can be processed through Machine A1 in one minute?

46、Product 1 Product 2 a. 1 unit 0.5 unit b. 1 unit 2.0 units c. 2 units 1.0 unit d. 2 units 0.5 unit,How many units of each product can be processed through Machine A1 in one minute? Product 1 Product 2 a. 1 unit 0.5 unit b. 1 unit 2.0 units c. 2 units 1.0 unit d. 2 units 0.5 unit,Quick Check ,Thats s

47、o easy.,Quick Check ,What generates more profit for the company, using one minute of machine A1 to process Product 1 or using one minute of machine A1 to process Product 2? a. Product 1 b. Product 2 c. They both would generate the same profit d. Cannot be determined,What generates more profit for th

48、e company, using one minute of machine A1 to process Product 1 or using one minute of machine A1 to process Product 2? a. Product 1 b. Product 2 c. They both would generate the same profit d. Cannot be determined,Quick Check ,With one minute of machine A1, we could make 1 unit of Product 1, with a c

49、ontribution margin of $24, or 2 units of Product 2, each with a contribution margin of $15. 2 $15 $24,Utilization of a Constrained Resource,The key is the contribution margin per unit of the constrained resource.,Product 2 should be emphasized. Provides more valuable use of the constrained resource

50、machine A1, yielding a contribution margin of $30 per minute as opposed to $24 for Product 1.,Utilization of a Constrained Resource,If there are no other considerations, the best plan would be to produce to meet current demand for Product 2 and then use remaining capacity to make Product 1.,The key

51、is the contribution margin per unit of the constrained resource.,Utilization of a Constrained Resource,Lets see how this plan would work.,Utilization of a Constrained Resource,Lets see how this plan would work.,Utilization of a Constrained Resource,Lets see how this plan would work.,Utilization of a

52、 Constrained Resource,According to the plan, we will produce 2,200 units of Product 2 and 1,300 of Product 1. Our contribution margin looks like this.,The total contribution margin for Ensign is $64,200.,Quick Check ,Colonial Heritage makes reproduction colonial furniture from select hardwoods. The

53、companys supplier of hardwood will only be able to supply 2,000 board feet this month. Is this enough hardwood to satisfy demand? a. Yes b. No,Colonial Heritage makes reproduction colonial furniture from select hardwoods. The companys supplier of hardwood will only be able to supply 2,000 board feet

54、 this month. Is this enough hardwood to satisfy demand? a. Yes b. No,Quick Check ,2 600 + 10 100 = 2,200 2,000,Quick Check ,The companys supplier of hardwood will only be able to supply 2,000 board feet this month. What plan would maximize profits? a. 500 chairs and 100 tables b. 600 chairs and 80 t

55、ables c. 500 chairs and 80 tables d. 600 chairs and 100 tables,The companys supplier of hardwood will only be able to supply 2,000 board feet this month. What plan would maximize profits? a. 500 chairs and 100 tables b. 600 chairs and 80 tables c. 500 chairs and 80 tables d. 600 chairs and 100 table

56、s,Quick Check ,Quick Check ,As before, Colonial Heritages supplier of hardwood will only be able to supply 2,000 board feet this month. Assume the company follows the plan we have proposed. Up to how much should Colonial Heritage be willing to pay above the usual price to obtain more hardwood? a. $4

57、0 per board foot b. $25 per board foot c. $20 per board foot d. Zero,As before, Colonial Heritages supplier of hardwood will only be able to supply 2,000 board feet this month. Assume the company follows the plan we have proposed. Up to how much should Colonial Heritage be willing to pay above the u

58、sual price to obtain more hardwood? a. $40 per board foot b. $25 per board foot c. $20 per board foot d. Zero,Quick Check ,The additional wood would be used to make tables. In this use, each board foot of additional wood will allow the company to earn an additional $20 of contribution margin and pro

59、fit.,Managing Constraints,Finding ways to process more units through a resource bottleneck,Produce only what can be sold.,Streamline production process.,Eliminate waste.,At the bottleneck itself: Improve the process Add overtime or another shift Hire new workers or acquire more machines Subcontract production,补充：生产受到资源约束时的决策,1、生产只受一种资源约束,产品销售不受限制,产品销售受限制,单位资源贡献边际法 贡献边际总额法,决策思路：首先，分别计算各种产品的单位资源贡献边际 然后，按各产品的单位资源贡献边际排序； 最后，按照此排序安排各种产品的生产,例：,某企业生产三种产品，有关生产和销售情况如下：,公司本年末有存货甲500件，存货丙400件。三种产品使用同样的原材料，消耗同样的直接人工。预计明年材料供应将限制在96000元，因人工小时的限制使得人工成本限制在13