ACCT 210 1st EditionExam 2 Study Guide: Lectures: 9 - 14Lecture 9Chapter 8Identifying relevant informationRelevant costs are costs that are applicable to a manager’s decision. These costs do NOT changeas a result of choosing different alternatives.Avoidable costs are relevant costs that can be eliminated as a result from choosing one alternative over another. All costs are avoidable except sunk costs and unavoidable future costs that do not differ between alternatives. Special order pricingA special order is a one-time order that is not considered part of a company’s normal ongoing business. One should only consider the incremental benefits of accepting the special order. In general, a special order is profitable as long as the incremental revenue from the special order exceeds the incremental costs of the order.Lecture 10Direct materialsDirect laborVariable manufacturing overheadFixed manufacturing overhead$3 3 4 8Total $18Make or buy decisionsDo I make it myself or outsource (buy) from someone else?EXAMPLE PROBLEM: Outland Company manufactures 1,020 units of a part that could be purchased from an outside supplier for $13 each. Outland's cost to manufacture each part are as follows:All fixed overhead is unavoidable and is allocated based on direct labor. The facilities that are used to manufacture the part have no alternative usesANSWER: Relevant costs: DM, DL, VOHIrrelevant: FOHDM + DL + VOH = VC = $10$10 < $13; Yes they should continue to manufacture itAllocating constrained resourcesA company has constrained resources when a limited resource of some type restricts the company’s ability to satisfy demand. Producing those products that have the highest contribution margin per unit of constrained resource will maximize total contribution margin.EXAMPLE PROBLEM: Umbrella Co. is considering the introduction of three new products. Per unit sales and cost information are as follows:The company only has 1,800 excess direct labor hours. How many of each product should Umbrella Co. produce and sell to maximize itsprofit?ANSWER: Contribution margin per unit:Product A: CM = $4 - 1.2 = $2.80Product B: CM = $7 - 3.4 = $3.60Product C: CM = $13 – 12 = $1.00Contribution margin per labor hour:Product A: $2.8 ÷ 1.2 = $2.33Product B: $3.6 ÷ 0.5 = $7.20Product C: $1 ÷ 5 = $0.20Order of product: Produce all available of B, all of A, and what’s left of CProduce Hours/unit Hours used(# producedx hrs/unit)Hrs available(1800 –hours used)A B CSales priceVariable costsFixed costsLabor hours per unitMonthly demand in units$4.00$1.20$0.501.2 hours610$7.00$3.40$1.000.5 hours475$13.00$12.00$3.505 hours240BAC610475185*0.51.2530557092514959250*Only produce 185 because there are only 925 labor hours left. 925 ÷ 5 = 185Lecture 11Chapter 10DecentralizationIn decentralized organizations, decision-making authority is in the hands of the mangers of subunits within the organization. Most firms are neither full centralized nor full decentralized. Centralization is a continuum.Responsibility accountingOrganization divided into operating units where managers have decision-making authorityLecture 12Segment marginsSegment margin = Revenue – variable costs – traceable fixed costsSegment margin = operating income of that divisionReturn on investment (ROI)Return on investment (ROI) = Operating income ÷ average total assetsROI = Margin x TurnoverMargin = Operating incomeSalesrevenueTurnover = SalesrevenueAveragetotal assetsEconomic value added (EVA)EVA = Net operating profit – (invested capital x WACC)Net operating income = Operating income – income taxesInvested capital = Total assets – current liabilitiesLecture 13Chapter 6Flexible budgetsStatic budget is the budget that you chose to use for your estimates. Variance is the difference between actual costs and static budget costs. If the variance increases net income, it is considered favorable. If it decreases net income, it is unfavorable.Why do you think the valves on the left side of the heart (mitral and aortic semilunar valves) are more commonly affected by valvular stenosis than the valves on the right side of the heart?More problems occur in the valves of the left side of the heart are moreLecture 14Price variancePrice variance = (actual quantity purchased x actual price) – (actual quantity purchased x standard price)Quantity varianceQuantity variance = (Actual quant used x standard price) – (stand quant x stand