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    Cost & Managerial Accounting II Essentials
    Cost & Managerial Accounting II Essentials
    Cost & Managerial Accounting II Essentials
    Ebook175 pages1 hour

    Cost & Managerial Accounting II Essentials

    By William D. Keller

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    About this ebook

    REA’s Essentials provide quick and easy access to critical information in a variety of different fields, ranging from the most basic to the most advanced. As its name implies, these concise, comprehensive study guides summarize the essentials of the field covered. Essentials are helpful when preparing for exams, doing homework and will remain a lasting reference source for students, teachers, and professionals. Cost & Managerial Accounting II includes short-run and long-run decisions, joint and by-products, service department cost allocations, measuring and interpreting variances, cost allocation to various divisions, costing, contribution margin, gross margin, mix, yield, revenue variances, control of decentralized operations, planning, control and capital rationing, operations management, and pricing of products and services.
    LanguageEnglish
    PublisherResearch & Education Association
    Release dateJan 1, 2013
    ISBN9780738671925
    Cost & Managerial Accounting II Essentials

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      Cost & Managerial Accounting II Essentials - William D. Keller

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      CHAPTER 12

      SHORT-RUN DECISIONS: RELEVANT COSTS FOR DECISION MAKING

      12.1 THE DIFFERENTIAL PRINCIPLE

      The Differential Principle–In deciding whether or not to accept a one-time order at a lower price, only the added variable costs need to be considered in the short run, because the fixed costs must be paid anyway. As long as the variable costs of the one-time order are less than the sales income, then it is profitable to accept the order. (In this case, Differential means the difference between the variable costs and the sales revenue. In the long run analysis, both fixed and variable costs would have to be subtracted from sales income.)

      12.2 RELEVANT COSTS

      Relevant Costs–Those costs that are important in making the decision. In this case, only the variable costs would be relevant or important in the short run.

      12.3 MAKE-OR-BUY DECISIONS

      Make-or-Buy Decisions–Should a firm make some of its raw materials or buy them? Example: Should an auto-manufacturing firm make its owntires forits cars orshould it buy them from tire companies?

      1. Qualitative Decision–Dependability of suppliers, and quality control of purchased materials.

      2. Quantitative Decision (Example shown below)

      In the Quantitative Decision above, the Profit derived by buying some of the raw materials was $3,000 while the profit from making these ourselves was $10,000 (a difference of $7,000), so in this case it would be preferable quantitatively to make.

      12.4 ADDING OR DROPPING PARTS OF OPERATIONS

      If the differential revenue from the sale of a product is greater than the differential costs required to provide the sales, then the product makes profits and should continue to be manufactured. This is true even if the product generates a net loss in the financial statements because of the allocation of overhead costs to it. A product should be kept if it covers its differential costs and if no other alternative use of the production and sales facilities exist.

      Let us imagine that the Brown Manufacturing Company has three products, and that it uses common facilities to produce and sell all of these. No product has any effect on the sales of any other.

      Brown Manufacturing Company

      Differential Analysis of Dropping a Product

      With Product C showing a net loss of $1,000, some of the officials have suggested dropping Product C.

      Since all products use the same factory facilities, no fixed costs will be saved from dropping the product. Product C has the lowest product contribution margin so perhaps management should consider producing some other product. If this is not done, it would pay to continue manufacturing Product C as well as the other products.

      12.5 PRODUCT CHOICE DECISIONS

      Product Choice Decisions–All other things being equal, the company should produce the products with the greatest contribution margins.

      12.6 SETUP COSTS

      Setup Costs–The labor and other costs involved in getting facilities ready for a run of a different product.

      12.7 COSTS OF NOT CARRYING SUFFICIENT INVENTORY

      Firm would run out of stock. These costs would include customer ill will, quantity discounts forgone, unstable production, more transportation charges, and lost sales.

      REVIEW QUESTIONS

      1. What is meant by DIFFERENTIAL?

      The difference between two figures. In this case it is usually the difference between sales in dollars and variable costs.

      2. What are relevant costs?

      The only important costs that should be taken into consideration when making a decision.

      3. Are cost accountants more important in helping with qualitative or quantitative decisions?

      Quantitative.

      4. How can a cost accountant be helpful in make-or-buy decisions?

      They can present comparative income statements showing which method will result in a higher operating profit.

      5. How are cost accountants helpful in advising management whether or not to drop or add parts of operations?

      Here, things may not be what they seem. It is not the segment that adds most to net income that is important, but the segments that make positive contribution margins.

      6. How does a firm decide which products to produce?

      Those that make the highest contribution margins.

      CHAPTER 13

      LONG-RUN DECISIONS: CAPITAL BUDGETING

      13.1 NET PRESENT VALUE METHOD

      Net Present Value Method–A means of determining whether or not a capital investment decision should be made.

      Should we buy a new piece of broom-making machinery for the broom factory?

      The machine will cost $100,000 and should last 4 years.

      The new machine should bring a net cash inflow (the difference between cash inflows and outflows for the year) of $50,000 the first

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