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UNT ACCT 2020 - 7 Decisions that utilize Managerial Accounting
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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?ACCT 2020 1st Edition Lecture 12Outline of Last Lecture I. Terminology ReviewII. Terminology ReviewIII. Exam ReviewOutline of Current LectureI. 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?Current LectureI. Are costs/ benefits are relevant / irrelevant for a decision?- Which costs and benefits are relevant or irrelevant for a decision? o Relevant cost is something that is different between alternative and irrelevant costs are the same between alternatives. If something is unavoidable than it is irrelevant, Fixed costs. Sunk costs and future costs that we cannot change are irrelevant.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.- We’ve touched on this a bit, we only want to evaluate things that are different between the two to help simplify to two. Differential costs/benefits are relevanto Make sure you are evaluating costs for current decision at hand. - Using this differential approach saves us time instead of organizing a whole income statementII. Should we add or drop a segment?- This will look similar to chapter 5, but we will compare fixed cost savings to the contribution margin we will lose from that segment. We need to be saving enough money to make up for the lost contribution margin for the segment to be dropped.o Depreciation is a sunk cost, unless relevant. Regardless of what method, we will still see depreciation as irrelevant. o Why should we keep a segment if showing a loss? Common costs, when allocated, can alter the finding and amount of profitability. III. Should we make or buy a component?- Sometimes they need to decide if they should manufacture a component or outsource this component. Is it worth their while to make the component? When evaluating, we want to compare costs we could avoid by buying it. We compare avoidable and opportunity cost to the purchase price.o We only want to consider costs that we would NOT need to pay if we don’t make the component. ONLY VARIABLE, depreciation will not go away unless it had a resale value. IV. Do we accept the opportunity to make a special order?- Lets say a bike company could sell their product in bulk to another company at a lower offer. 5000 for 200 bikes is that worth it to us and will it cover our costs? WE want to compare the sales price for the special order to the incremental cost of supplying this order. We want to ignore unavoidable costs, so do not consider FIXED costs, only incremental.o Opportunity cost is considered. Not actually cash outlays, not in accounting information. For apple, it makes more sense to buy, so that they can devote moremoney to design. V. How do we want to use a constrained resource?- Company has a very large demand for its products, given the current level of resource, there’s no way we can saturate the demand. So which products do we emphasis? Whichever is most profitable per constrained resource and produce that product. Say employee resource is constrained, which product will employees work on first? Produce the product with the highest contribution margin per unit of the constrained resource. So, for example we would look at contribution margin / per labor hours. Focus on this product UP TO DEMAND FOR THAT PRODUCT and then focus on the next most profitableVI. Increase the constrained resource? At what cost?- One obvious option is to allow overtime, is it worth it though? Is the money they will bring in greater than the increased cost? We should be willing to pay up to the contribution margin per unit of the constrained resourceVII. 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


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UNT ACCT 2020 - 7 Decisions that utilize Managerial Accounting

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