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UNT ACCT 2020 - managerial accounting techniques to dealing with constraints
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I. Special Order SalesII. Constrained resourcesIII. Constrained Resource Increase?IV. Sell or continue to produce a component of joint product?ACCT 2020 1st Edition Lecture 13Outline of Last Lecture I. Are costs/ benefits are relevant / irrelevant for a decision?II. Should we add or drop a segment?III. Should we make or buy a component?IV. Do we accept the opportunity to make a special order?V. How do we want to use a constrained resource?VI. Increase the constrained resource? At what cost?VII. Sell or continue to produce a component of joint product?Outline of Current LectureI. Special Order SalesII. Constrained resourcesIII. Constrained Resource Increase?IV. Sell or continue to produce a component of joint product?Current LectureI. Special Order Sales- Special order sales need to assume that by lowering the sales to one person we do NOT lower the sales price to another person. Doesn’t affect the number or any other profits. These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best Used as a supplement to your own notes, not as a substitute.Fixed expenses will exist regardless of special orders. Need to make sure they are in theircurrent capacity, if not than the fixed expenses will also increase. - All we want to look at is the incremental cost, because fixed costs will not change. So look at the variable cost per unit compared to the price per unit offered by the customer.- (Variable expenses + extra fixed expenses) /# of units = minimum price/unito (100,000+50,000) / 10,000 = $15/unito Can also be (variable expense per unit + cost of extra fixed expenses per unitII. Constrained resources- A constraint, or bottleneck, is a limited resource of some type that limits production, could be anything. A certain machine that has a max amount of hours or workers time, etc. allocation of the constrained resource is unaffected by fixed costs. o We are interested on the amount of time each product requires of the constraint.So in the example we see that in one minute we can produce one unit of productone and 2 units of product two. What generates more profit? Well if product twoproduces twice the units at a 15$ than just one unit of product at 24$, so makes more sense to produce more of product 2. We first want to focus on product two. Make as many of product 2 as the demand will sustain. o So we produce 2200 units, the demand, for product 2 and the remaining minutesare used for product 1. This is how you maximize profit. III. Constrained Resource Increase?- In the previous problem, the constraint was machine A1, so should we increase the constraint to have more minutes available? Increased capacity of a constrained resource should lead to increased production and sales, this is all assuming that demand is there. o In the last problem, we saw that we had some demand left for product 1. The additional time would be used to make these. So we should be willing to pay UP TO the contribution margin for that product. o Always be willing to pay additionally for more increase of constraint equal to the contribution margin per unit of the product- It is often possible to increase capacity by working overtime on the bottleneck. If the bottleneck is direct labor, than we can ask employees to work overtime to increase capacity. We can also contract out some of that product to increase capacity. If the constraint is machines, maybe we just buy another machine. We can shift workers from non-bottleneck processes to bottleneck processes. Also, we can focus on business processes that could improve the capacity and decrease defective units to create a more effective system. - A bottleneck could be the amount of surgeries a doctor can perform in a hospital or the people getting on plane ahead of you that delay your arrival at your seat. IV. Sell or continue to produce a component of joint product?- This is about the option of using a raw material to produce both products or produce one. What’s the current selling price compared to the incremental profit of that product,once again not taking into consideration fixed costs. o (Incremental revenue-incremental cost)- There is a split-off point when they can be separated. For petroleum refining, there are common production costs, but at some point we are able to separate these raw materials and we decide if we sell it now as a raw material or continue producing. Costs that occur up to the split-off point are not relevant to the system. Joint costs are irrelevant, unless Relative sales values are being used for financial statement purposes. - Compare the incremental revenue of processes to the incremental cost of producing. o Saw mill incorporation cuts logs from which unfinished lumber and sawdust are immediate products. Can be processes into finished into lumber or sold as sawdust.o Allocated joint product costs are NOT CONSIDERED FOR THIS DECISION. o The cost of further processing (incremental) so L=50, S=20. Right now we could sell the sawdust for 40 with no work, for 20 more dollars we can get 10 more dollars… so not a good deal, just sell unfinished.- In ABC, we allocated May types of cost. Those fixed costs are not differential. If it’s an ABC system, we exclude ANY fixed costs. Some variable costs might not change depending on the option. Make sure only compare things that are different between


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UNT ACCT 2020 - managerial accounting techniques to dealing with constraints

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