Criteria that must be met for the information to be relevant Difference between accuracy and relevance Variable costs are always Fixed costs are Unavoidable costs are sometimes called What do you do with unavoidable costs in decision making Unavoidable costs are Incremental revenue Incremental cost If incremental revenue is greater than incremental cost If incremental revenue is less than incremental cost Sunk cost Differential costs Opportunity costs Identifying special order decisions How do you solve special order decisions 1 2 It must be an expected future revenue or cost It must be different in some way from the other alternatives Information is very rarely both accurate and relevant Often accountants have to trade relevance for accuracy Qualitative info Is more ikely to be inaccurate than quantitative info Avoidable Sometimes avoidable and sometimes unavoidable Common costs Ignore them Irrelevant How much more revenue how much the revenue changes How much more costs how much the cost changes Do it Don t do it Type of unavoidable cost that comes from money already spent Costs that differ between the alternative courses of action The cost of the next best thing foregone We typically make a certain product and someone comes along and wants to buy a large amount of our product for a discount 2 1 Create two columns at the bottom of the page labeled Incremental Revenue and Incremental Cost In these columns write down the change in revenue and change in costs that would occur as a result of accepting the special order 3 The correct answer will always be in terms of the difference How to identify Make vs Buy Decisions WE have to decide whether to make a How to solve the Make vs Buy Decision What is always avoidable unless sated otherwise If by buying the product elsewhere you can avoid some fixed costs add that as a cost to If by buying the product elsewhere you can use the factory for something else add that as a to the How to identify a allocating constrained resources decision How to solve allocating constrained resources decision product input ourselves or just buy it from an outside supplier 1 Create two columns at the bottom of the page labeled Make and Buy 2 Write down the costs associated with making the product and buying the product 3 The column that results in the lower total cost is the one we pick 4 The correct answer should be in terms of the difference Direct materials direct labor and variable factory overhead The make column Opportunity costs make column We have to decided between producing two or three different products usually in the presence of constraints something that limits us 1 We determine which product is better by way of contribution margin 2 Once we determine which 3 product is better we make as many as we can of that product If demand or resources are limited for the better product we make as much of it as we can and then move on to the worse product If there are no constraints the product with the higher total CM is If there are constraints the product with the higher CM per constraint is The most common constraint is Bottleneck Better Better How to identify keep or eliminate a segment decision What is the segment margin formula If the segment margin is positive Time The constraint that limits the firm the most We have to decide if we should get rid of our department if it is showing a loss CM Direct Avoidable Fixed Costs It is helping so keep it If the segment margin is negative How to solve Keep or Eliminate a Segment Decision How to identify Sell vs Process Further Decision How to solve Sell vs Process Further Decision It is hurting so ditch it 1 For the segment we are 2 considering closing always start off by computing the segment margin If we can expand another segment we have to compute the incremental CM associated with that segment s expansion 3 Compare this incremental CM to the segment margin to see if it s worthwhile to eliminate the segment Ignore unavoidable costs 4 We have some products that are made from a common input We have to decide which to just sell now and which to process further 1 Create two columns at the bottom of the page labeled Incremental Revenue and Incremental Cost 2 Write down the change in revenue and change in costs that would occur as a result of processing each item further 3 Correct answer will always be in terms of the difference What are joint products Are they irrelevant or relevant What are separable costs Are they irrelevant or relevant Strategic planning Many products produced together until a split off point Always irrelevant Costs associated with processing further Always relevant Broad planning that helps identify the overall focus of an organization Specific planning that develops concrete actions to turn strategic plans into reality What is a component of tactical planning Budget Budget Tactical planning What are the benefits of budgets A plan indicating what expenses costs will be incurred throughout a period of time Forces managers to think ahead Serves as a benchmark for performance evaluation Facilitates communication Top down budgeting What is the most efficient method of preparation of budgeting Bottom up budgeting Participative budget Budgetary padding 2 budget starting points Incremental Budgeting Zero based budgeting Which is more time consuming What are the two main time frames in which budgets are prepared Annual budget Rolling budget Can adjustments be made to budgets What is the master budget Which budget is considered the most important 3 types of standards between different divisions of the company First upper management sets a profit goal Then they work down from there all the way down to how much materials must be purchased how much must be sold etc Top down budgeting because it involves the fewest people Ask people at the bottom what they think will happen as far as sales next year and then based upon their answers decide how much to produce how much labor and materials needed Generally produces more accurate results and gives employees a sense of responsibility and empowerment Over estimating or under estimating revenues to make yourself look good 1 Incremental budgeting 2 Zero based budgeting Start with this period s budget and then add subtract funds for any anticipated changes in operations Start with nothing and build the budget from scratch Zero based budgeting 1 Annual budget 2 Rolling budget Budget is prepared for 12 months and once those 12 months lapse a new budget is
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