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ACC 132: FINAL
Relevant Cost or Benefit |
a cost that differs between between alternatives in decision.
This term is synonymous with:
Avoidable Cost
Differential Cost
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Avoidable costs |
can be eliminated in whole or in part by choosing one alternative over another. Avoidable costs are relevant costs
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Costs that are never relevant in decisions |
sunk cost
future cost that do not differ between alternatives
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Costs to make decisions |
Relevent costs
ignore sunk costs and future costs that do not differ between alternatives
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Adding and Dropping Product Lines and Other Segments |
Depends mostly on the net operating income
Contribution margin lost if droped
-fixed costs that can be avoided
=disadvantage of dropping line
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Make or Buy Decision |
decision to carry out one of the activities in the value chain internally rather than to buy externally from a supplier.
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Special Order |
one time order that is not considered part of the companies normal ongoing buisness
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Constraint |
when a limited resource of some type restricts the companys ability to satisfy demand
managers must decide which products or services make the best use of the constrained resource
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Bottleneck |
machine or process that is limiting overall output
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When capacity cannot satisfy demand something must me cut back |
maximizing the total contribution margin will maximize the total profits
total contribution margin is maximized by emphasizing the products with greatest contribution margin per unit of the constrained resource
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Managing Constraints |
Produce only what can be sold
Pay workers overtime to keep bottleneck running after normal working hours
Shift workers from non bottleneck areas to the bottleneck
hire more workers or acquire more machines
subcontract some of the production that would use the bottleneck
subcontract some of the production that would use the bottleneck
focus business process improvements on bottlekneck
reduce defects
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split off point |
point in the manufacturing process at which the joint products can be recognized as separate products.
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joint cost |
describe the costs incurred up to the split off point
common costs that are incurred to simultaneously produce a variety of end products
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Statement of Cash Flows |
In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
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Statement of Cash Flows Preparation |
change in the cash balance must equal the changes in all other non cash balance sheet accounts
this principle ensures that properly analyzing the changes in a ll non cash balance sheets accounts always quantifies the cash inflows and outflows that explain the change in cash balance
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Statement of Cash Flows Basic Equations |
to prepare the statement of cash flows, you need to understand two basic equations that apply to all assets, contra assets, liabilities, and stockholders quity
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Basic Equation for Asset Accounts |
Beginning balance + Debits - Credits = Ending balance
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Equation for Contra assets, liability,and stockholders equity account |
beginning balance - debits + credits = ending balance
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Organizing the Statement of Cash Flows Three Sections |
Operating Activities
Investing Activities
Financing Activities
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Organizing Statement of Cash Flows 2 Methods |
US GAAP and IFRS allow for 2 methods
Direct Method
Indirect Method
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Direct Method Organizing Statement of Cash Flows |
Cash receipts from customers
Chas paid for inventory purchases
Cash paid for selling and admin expenses
Cash paid for income taxes
Net Cash provided by operating activities
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Indirect Method Organizing Statement of Cash Flows |
Net Income
Various adjustments
net cash provided by operating activities
Step 1 add depreciation
Step 2 Analyze net changes in non cash balance sheet accounts
Increase in current assets account
Decrease in current asset accounts
Increase in current liabilities accounts
Decrease in current liabilities accounts
Step 3 : adjust for gain loss, gain on sale,loss on sale
net cash provided by operating activities
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Statement of Cash Flows Investing Section |
Purchase of property plant and equipment
sale of property, plant, and equipment
purchase of long term investments
sale of long term investments
net chas provided by investing activities
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Statement of Cash Flows Financing Activities |
insurance of bonds payable
repaying principle on bonds payable
issuance of common stock
purchase own shares of common stock
paying a dividend
Net cash provided by financing activities
net increase in cash and cash equivalents
cash and cash equivalents beginning balance
cash and cash equivalents ending balance
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Sunk Cost |
cost that has already been incurred and cannot be avoided regardless of managers decisions
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Differential Cost |
identify the costs that are avoidable in a particular decision situation and are therefore relevant
1. Eliminate costs that benefits that do not differ between alternatives. These irrelevant costs consiste of a sunk cost and future costs that do not differ between alternatives
2.Use the remaining cost and benefits that do differ between alternatives in making the decision.The cost that remain are the differential or avoidable cost.
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Comparative Format |
comparative income statement showing the effects of either keeping or dropping the product line
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Vertically Integrated |
company is involved in more than one activity in the entire value chain
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Relaxing (or elevating) the constraint |
increase the capacity of the bottleneck
For example stitching machine operator could be asked to work overtime this would result in more available stiching time
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Ways of effectively Increasing the Bottleneck |
Working overtime on the bottleneck
Subcontracting some of the processes that would be done at the bottleneck
Investing in additional machines at the bottleneck
Shifting workers from processes that are not bottlenecks to the process that is the bottleneck
Focusing business process improvement efforts such as Six Sigma bottleneck
Reducing defective units. Each defective unit that is processed through the bottleneck and subsequently scrapped takes the place of a good unit that could have been sold
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Sell or Process Further Decisions |
a decision as to weather a joint product should be sold at the split off point or sold after further processing
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Incremental Cost |
change in cost that will result from some proposed action
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When is a variable cost also a relevant cost |
only if they differ in total between the alternatives under consideration for the purpose of decision making
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Are all fixed costs sunk |
no only those costs that have already been incurred are sunk
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Are variable and differential costs the same |
a variable cost is a cost that varies in total amount in direct proportion to changes in level of activity
A differential cost is the difference in cost between two alternatives a variable cost will not be affected and it will be irrelevant
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Are all future costs relevant in decision making |
no only those future costs that differ between the alternatives under consideration are relevant
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If a product line is is generating a loss should it be discontinued |
no not necessarily,a loss may be from a common stock or a sunk cost that cannot be avoided if the product line is dropped
Only drop product line if contribution margin that is lost is less than the fixed cost that would be avoided.
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danger in allocating common fixed costs among product lines or other segments |
allocations of common fixed costs can make a product line or segment appear to be unprofitable where in fact it may be profitable
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From a Decision making view Should joint costs be allocated between joint products |
joint products and joint costs should not be allocated together because they might be confused as avoidable costs
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Guidelines for determining weather a joint product should be sold split off or processed further |
if the incremental revenue from further processing exceeds the incremental cost of further processing the product should be processed further
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Cash equivalents |
consist of short term, highly liquid investments such as Treasury bills, commercial paper, and money market funds solely for generating a return on temporally idle funds.
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Operating Activities |
activities that affect current assets, current liabilities, or net income
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Investing Activities |
include transactions that involve acquiring or disposing of non current assets such as acquiring or selling property, plant, and equipment, long term investments such as bonds and stocks, lending money to another entity
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Financing Activities |
borrowing from or repaying creditors and transactions with the companies owner
company borrows money by issuing a bond
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net cash provided by operating activities |
net amount of cash inflows and outflows resulting from operating activities
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Reconciliation Method |
another name for the indirect method operating activities
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Free Cash Flow |
measures a companies ability to fund its capital expenditures for property, buildings, and equipment
= Net Cash Provided by Operating activities
- capital expenditures
- dividends
= free cash flow
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