ACCT 210 1st Edition Exam 2 Study Guide Lectures 9 14 Lecture 9 Chapter 8 Identifying relevant information Relevant costs are costs that are applicable to a manager s decision These costs do NOT change as 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 pricing A 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 10 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead 3 3 4 8 Total 18 Make or buy decisions Do 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 uses ANSWER Relevant costs DM DL VOH Irrelevant FOH DM DL VOH VC 10 10 13 Yes they should continue to manufacture it Allocating constrained resources A 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 A B C Co produce Sales price 4 00 7 00 13 00 and sell to Variable costs 1 20 3 40 12 00 maximize its Fixed costs 0 50 1 00 3 50 profit Labor hours per unit 1 2 hours 0 5 hours 5 hours Monthly demand in units 610 475 240 ANSWER Contribution margin per unit Product A CM 4 1 2 2 80 Product B CM 7 3 4 3 60 Product C CM 13 12 1 00 Contribution margin per labor hour Product A 2 8 1 2 2 33 Product B 3 6 0 5 7 20 Product C 1 5 0 20 Order of product Produce all available of B all of A and what s left of C Produce Hours unit Hours used produced x hrs unit Hrs available 1800 hours used B A C 610 475 185 0 5 1 2 5 305 570 925 1495 925 0 Only produce 185 because there are only 925 labor hours left 925 5 185 Lecture 11 Chapter 10 Decentralization In 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 accounting Organization divided into operating units where managers have decision making authority Lecture 12 Segment margins Segment margin Revenue variable costs traceable fixed costs Segment margin operating income of that division Return on investment ROI Return on investment ROI Operating income average total assets ROI Margin x Turnover Operating income Margin Salesrevenue Salesrevenue Turnover Average total assets Economic value added EVA EVA Net operating profit invested capital x WACC Net operating income Operating income income taxes Invested capital Total assets current liabilities Lecture 13 Chapter 6 Flexible budgets Static 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 more Lecture 14 Price variance Price variance actual quantity purchased x actual price actual quantity purchased x standard price Quantity variance Quantity variance Actual quant used x standard price stand quant x stand price