DOC PREVIEW
Mizzou ACCTCY 2037 - Chapter 14 Outlines

This preview shows page 1-2-3 out of 9 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 9 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 9 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 9 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 9 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

Chapter 14: Short Term Planning DecisionsDecision MakingCritical thinkingRecognize the need for a decision (define the problem)Identify alternative solutionsEvaluate alternative solutionsMake the decision choose the best alternativeEvaluation-very importantImportant area where decision alternatives make a difference is in a company’s profitAffect on employees, community, environment, etc.Relevant Costs and RevenuesTo understand the profit impact of a decision, managers must carefully analyze the costs and revenues that the decision affects-or the relevant costs and revenues.Relevant costs and relevant revenues are future costs and revenues that will change as a result of a decision.a cost or revenue that is relevant for one decision may not be relevant for anotherimportant part of preparing an analysis for a decision is to identify the costs and or revenues that are relevant for that decision.Incomplete profit information could result in an incorrect decisionCosts and revenues that are not relevant should be omitted from analysisDetermining Relevant Costs and Revenues for a DecisionTwo questions1.What activities are necessary for the company to carry out the decision?2. By how much will the costs and/or revenues be affected if the company undertakes the activities?What Activities are necessary for the company to carry out the decision?The key to identifying potentially relevant costs is to have a good understanding of the company’s activities that are necessary to carry out the decisionActivities are the cause of all relevant costsOnly costs that the company incurs as a result of performing these activities can be relevantNo cost incurred prior to making the decision is relevantAll costs that the company incurs as a result of the activities must be future costsPasts costs=sunk costs, eliminated from considerationFuture costs that a company will incur for activities that are not necessary to carry out the decision are not relevantThese costs relate to other activities that would be undertaken regardless of the outcome of this decisionBy how much will the costs and/or revenues be affected if the company undertakes the activities?Costs required by decision remain for further analysisA specific cost is relevant only if the total amount that the company will incur is affected by the decisionThis fact cannot always be determined until the amounts of potential relevant costs are estimatedCost estimation has two purposes: to provide estimates of relevant costs and to further eliminate irrelevant costsExhibit 14-1 Three Step Process of Identifying Relevant CostsStep 1: Eliminate past costsStep 2: eliminate costs not necessary to carry out decision alternativesStep 3: eliminate costs that would not differ from one alternative to anotherOther Cost (and Revenue) Concepts for Short Term DecisionsIncremental costsAdditional activity usually causes additional costsIncremental costs: cost increases resulting from a higher volume of activity or from the performance of an additional activityAlways relevant when the higher volume of activity, or the additional activity, is not necessary for all of the alternativesAvoidable CostsWhen a company discontinues an activity, or when it decreases its volume, it may reduce certain costs necessary to support that activity or may no longer incur them.Avoidable costs are the costs that a company must incur to perform an activity at a given level, but that it can avoid if the company reduces or discontinues the activity.Opportunity CostsPerforming activities needed for one of the alternatives in a decision sometimes disrupts a company’s other profitable activities or reduces its opportunity to engage in other future profitable activities.The profit impact of this disruption or lost opportunity must be included in decision analysis.Done by including opportunity costsOpportunity costs: the profits that a company forgoes by following a particular course of actionDeciding Whether to Drop a ProductManagers may decide to drop a product for a number of reasonsChanging technology, no longer profitable, customer interest decreases, product is becoming obsolete, poor safety record, new information indicates the product may harm the environment, etc.Ordinarily, products do not become unprofitable over night.Gradual decline in profitabilityConsider management accounting info that will highlight the profitability (or the decline in profitability) of individual productsProper analysis of a company’s cost and revenue information also can help the managers avoid decisions that result in either carrying a product too long or dropping it too soon.The key to evaluating the profit effects of a company’s decision to drop a product is to determine the costs that it would not incur (i.e. the avoidable costs) and the revenues that it would not earn if it discontinued production and sale of the product.Once avoidable costs are determined, the product profitability component of the decision to drop the product is straightforwardA company should drop a product only if the total avoidable costs are more than the revenue it would lose if it dropped the product.Under this condition the total company profit will be higher if it drops the product than if it continues to produce and sell the productDon’t only use management accounting information, look at other issues that affect the decision as wellEx: dropping an unprofitable product might affect the sales of another related productConsider employeesEven if a product turns out to be profitable, the company may consider dropping it for some other reasonEx: hazardous to customersManagement accounting provides an excellent means of determining relevant revenues and costs for particular decisions. By combining this with other relevant issues, managers can make informed, intelligent decisions.Deciding Whether to Make or Buy a PartMany products require a manufacturing process to convert basic direct materials into completed products of inventoryThese products are seldom produced entirely by one companyAny company that buys parts from another company may question whether it would be less costly to produce a part than to purchase it from an outside supplier.The company faces a make-or-buy decisionMany factors affect a make or buy decisionIf decide to produce, must buy equipment, must develop the know how, could be costlyA company can sometimes obtain a short term cost advantage by making partIf the company already has the equipment,


View Full Document
Download Chapter 14 Outlines
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Chapter 14 Outlines and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Chapter 14 Outlines 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?