Ch12 ACCG20478 (Cost 2) ppt MM

8/20/2019 Ch12 ACCG20478 (Cost 2) ppt MM

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Copyright © 2012 McGraw-Hill Ryerson Limited

12-1

PowerPoint Author:

Robert G. Ducharme, MAcc, CAUniversity of Waterloo, School of Accounting and inance

MA!AG"R#A$

ACC%U!&#!G!inth Canadian "dition

GARRISON, CHESLEY, CARROLL, WEBB,LIBBY

Relevant Costs for DecisionMakin

C!a"ter #$



12-2


#t's All About Ma(ing a Decision

“By the end of this course, students will havedemonstrated the ability to use managerial

accounting reports and analytical tools toplan, control and evaluate an organization.”

Course $earning %utcome



12-


“!dentify relevant costs and develop decisionma"ing models that can be used to support

recommendations made to the managementteam to improve overall profitability of acompany.”

#t's All About Ma(ing a Decision

Cha)ter *+ Relevant Costs forDecision Ma(ing



#-#


Agenda

!dentification of $elevant %osts &dding'(ropping a )egment

*a"e or Buy a %omponent

+valuating a )pecial rder

tilization of a %onstrained $esource

)ell or rocess /urther



#-0


Agenda








12-


Decision Ma(ing- Alternatives

+very decision involves choosing between at leasttwo alternatives.

1 2

1 (istinguish between relevant and irrelevant costs



12-3


Decision Ma(ing- Costs and ene/ts

*anagers ma"e decisions by identifying andfocusing on the costs and benefits that differ from

one alternative to another.

1 2




12-4


Decision Ma(ing- Costs and ene/ts

5he 6ey 7ord is8

AVOIDABLE AVOIDABLE

1 2




12-9


#dentifying Relevant Costs0ene/ts

!f you have to choose between!f you have to choose betweenalternative &alternative & andand alternative Balternative B

the :uestion becomes;the :uestion becomes;

““7hat costs'benefits are7hat costs'benefits arerelevant relevant

in choosingin choosingalternative &alternative &<<””

)ometimes the best way to answer that)ometimes the best way to answer that

:uestion is to actually as";:uestion is to actually as";““!f ! didn!f ! didn==t choose alternative & whatt choose alternative & what

costs'benefits would ! becosts'benefits would ! be avoidingavoiding<<””

!f you have to choose between!f you have to choose betweenalternative &alternative & andand alternative Balternative B

the :uestion becomes;the :uestion becomes;

““7hat costs'benefits are7hat costs'benefits arerelevant relevant

in choosingin choosingalternative &alternative &<<””

)ometimes the best way to answer that)ometimes the best way to answer that

:uestion is to actually as";:uestion is to actually as";““!f ! didn!f ! didn==t choose alternative & whatt choose alternative & what

costs'benefits would ! becosts'benefits would ! be avoidingavoiding<<””




12-1>


#dentifying Relevant Costs0ene/ts

&n &n avoidable costavoidable cost is a cost that can beis a cost that can beeliminated, in whole or in part, by choosingeliminated, in whole or in part, by choosing

one alternative over another.one alternative over another.

&voidable costs &voidable costs are relevant costs.are relevant costs.

navoidable costsnavoidable costs are irrelevant costs.are irrelevant costs.

5wo broad categories of costs are never5wo broad categories of costs are never

relevant in any decision are8relevant in any decision are8 )un" costs)un" costs ?unavoidable because they happened in the?unavoidable because they happened in the

past@past@ andand

/uture costs that/uture costs that do not differ do not differ between the alternativesbetween the alternatives

?unavoidable no matter what choice you ma"e@.?unavoidable no matter what choice you ma"e@.

&n &n avoidable costavoidable cost is a cost that can beis a cost that can beeliminated, in whole or in part, by choosingeliminated, in whole or in part, by choosing

one alternative over another.one alternative over another.

&voidable costs &voidable costs are relevant costs.are relevant costs.

navoidable costsnavoidable costs are irrelevant costs.are irrelevant costs.

5wo broad categories of costs are never5wo broad categories of costs are never

relevant in any decision are8relevant in any decision are8 )un" costs)un" costs ?unavoidable because they happened in the?unavoidable because they happened in the

past@past@ andand

/uture costs that/uture costs that do not differ do not differ between the alternativesbetween the alternatives

?unavoidable no matter what choice you ma"e@.?unavoidable no matter what choice you ma"e@.




12-11


Relevant Cost Analysis- A &1o2Ste)3rocess

Eliminate costs and benefits that do not differbetween alternatives.

Use the remaining costs and benefits that

differ between alternatives to help make thedecision. The costs and benefits that remainare the differential, or avoidable, costs andbenefits.

Step 1

Step 2

1



12-19


Connect #n2Class

+Aercise 12-1


12 2>



12-2>


Di4erent Costs for Di4erent 3ur)oses

Costs that arerelevant in one

decision situationma not be relevantin another conte!t.


12 21



12-21


Connect #n2Class

+Aercise 12-1#


12 22



12-22


5ason and Duc( 6unting

5hese three re:uirements in eAercise 12-1# illustrate the slippery nature of costs. &cost that is relevant in one situation can beirrelevant in the neAt. one of the costsC

eAcept possibly the cost of the shotgunshellsCare relevant when we compute thecost of bagging a particular duc"; some ofthem are relevant when we compute the

cost of a hunting trip; and more of themare relevant when we consider the

possibility of giving up hunting


12 2



12-2


5he management of a company is considering a new labour savingmachine that rents for D,>>> per year. (ata about the company=sannual sales and costs with and without the new machine are8

&otal versus Di4erential CostA))roaches


12 2#



12-2#


&s you can see, the only costs that differ between the alternatives arethe direct labour costs savings and the increase in fiAed rental costs.

"e can efficientl anal#e the decision blooking at the different costs and revenues

and arrive at the same solution.



12 20



12-20


Using the differential approach is desirable fortwo reasons$

1. %nl rarel will enough information beavailable to prepare detailed incomestatements for both alternatives.

2. &ingling irrelevant costs with relevant costs

ma cause confusion and distract attentionawa from the information that is reallcritical.



#-2



#-2


Agenda






12-23



12 23


Adding0Dro))ing Segments

%ne of the most important decisionsmanagers make is whether to add or dropa business segment, such as a product or

a store.

'et'et((s see how relevant costs shoulds see how relevant costs should

be used in this tpe of decision.be used in this tpe of decision.

%ne of the most important decisionsmanagers make is whether to add or dropa business segment, such as a product or

a store.

'et'et((s see how relevant costs shoulds see how relevant costs should

be used in this tpe of decision.be used in this tpe of decision.

2 repare analyses for various decision situations

12-24



12 24



(ue to the declining popularity of digital(ue to the declining popularity of digital

watches, ovell %ompanywatches, ovell %ompany==s digital watchs digital watch

line has not reported a profit for severalline has not reported a profit for several

years. ovell is considering discontinuingyears. ovell is considering discontinuingthis product line.this product line.

(ue to the declining popularity of digital(ue to the declining popularity of digital

watches, ovell %ompanywatches, ovell %ompany==s digital watchs digital watch

line has not reported a profit for severalline has not reported a profit for several

years. ovell is considering discontinuingyears. ovell is considering discontinuingthis product line.this product line.


12-29



12 29


A Contribution Margin A))roach

(+%!)! $+ovell should drop the digital watch segment only if its

profit would increase. 5his would only happen if thefiAed cost savings exceed the lost contribution

margin.

et=s loo" at the analysis.

(+%!)! $+ovell should drop the digital watch segment only if its

profit would increase. 5his would only happen if thefiAed cost savings exceed the lost contribution

margin.

et=s loo" at the analysis.


12->



12 >




Should 'ovell retain or drop

the digital watch segment)

12-1





!nvestigation has revealed that!nvestigation has revealed thattotal fiAed general factory overheadtotal fiAed general factory overhead andandtotal general administrative eApensestotal general administrative eApenses

would not be affected if the digital watch line iswould not be affected if the digital watch line isdropped. 5hey would simply be reallocated todropped. 5hey would simply be reallocated to

other product lines.other product lines.

5he e:uipment used to manufacture digital5he e:uipment used to manufacture digitalwatches has no resale value or alternative usewatches has no resale value or alternative use

?i.e. it is irrelevant to the decision@.?i.e. it is irrelevant to the decision@.


12-2






12-




A Contribution Margin A))roach

* e t a i n


12-#




Com)arative #ncome A))roach

5he ovell solution can also be obtained by preparingcomparative income statements showing results with

and without the digital watch segment.

etet==s loo" at this second approach.s loo" at this second approach.

5he ovell solution can also be obtained by preparingcomparative income statements showing results with

and without the digital watch segment.

etet==s loo" at this second approach.s loo" at this second approach.


12-0




+f the digital watch

line is dropped, thecompan gives up

its contributionmargin.


12-



Copyright © 2012 McGraw-Hill Ryerson Limited 2 repare analyses for various decision situations

%n the other hand, the totalgeneral factor overhead for thecompan would be the same. So

this cost reall isn(t relevant.

12-3




ut we wouldn(t need amanager for the product line

anmore.


12-4




+f the digital watch line is dropped, the net book valueof the e-uipment would be written off. The

depreciation that would have been taken over time will,instead, flow through the income statement as a one

time loss. So we can(t reall avoid the depreciation, it /ust hits the income statement in a different wa and

time.


12-9



Copyright © 2012 McGraw-Hill Ryerson Limited 2 repare analyses for various decision situations

12-#>




e1are of Allocated i7ed Costs

7hy should we "eep the7hy should we "eep thedigital watch segmentdigital watch segmentwhen itwhen it==s showing as showing a

D1>>,>>>D1>>,>>> lossloss<<


12-#1





5he answer lies in the5he answer lies in theway we allocateway we allocate

common fiAed costscommon fiAed costs toto

our products.our products.


12-#2





ur allocations canur allocations can

ma"e a segment loo"ma"e a segment loo"

less profitableless profitable than itthan it

really is.really is.


12-#




Connect #n2Class

+Aercise 12-2 +Aercise 12-4


#-##




Agenda






12-#0




&he Ma(e or uy Decision

7hen a company is involved in more than one activity7hen a company is involved in more than one activityin the entire value chain, it is vertically integrated. &in the entire value chain, it is vertically integrated. &decision to carry out one of the activities in the valuedecision to carry out one of the activities in the value

chain internally, rather than to buy eAternally from achain internally, rather than to buy eAternally from a

supplier is called asupplier is called a ““ma"e or buyma"e or buy”” decision.decision.

7hen a company is involved in more than one activity7hen a company is involved in more than one activityin the entire value chain, it is vertically integrated. &in the entire value chain, it is vertically integrated. &

decision to carry out one of the activities in the valuedecision to carry out one of the activities in the value

chain internally, rather than to buy eAternally from achain internally, rather than to buy eAternally from a

supplier is called asupplier is called a ““ma"e or buyma"e or buy”” decision.decision.


12-#




8ertical #ntegration Advantages

Smoother flow ofparts and materials

etter -ualitcontrol

*eali#e profits


12-#3




8ertical #ntegration Disadvantage

Companies ma failto take advantage of

suppliers who cancreate economies ofscale advantage b

pooling demand fromnumerouscompanies.


12-#4




&he Ma(e or uy Decision- An "7am)le

+sseA %ompany manufactures part #& that is used inone of its products.

5he unit product cost of this part is8


12-#9





5he special e:uipment used to manufacture part#& has no resale value.

5he total amount of general factory overhead,which is allocated on the basis of direct labour

hours, would be unaffected by this decision. 5he D> unit product cost is based on 2>,>>>

parts produced each year.

&n outside supplier has offered to provide the

2>,>>> parts at a cost of D20 per part.

)hould we accept the supplier )hould we accept the supplier ==s offer<s offer<

5he special e:uipment used to manufacture part#& has no resale value.

5he total amount of general factory overhead,which is allocated on the basis of direct labour

hours, would be unaffected by this decision. 5he D> unit product cost is based on 2>,>>>

parts produced each year.

&n outside supplier has offered to provide the

2>,>>> parts at a cost of D20 per part.

)hould we accept the supplier )hould we accept the supplier ==s offer<s offer<


12-0>





2>,>>> E D9 per unit F D14>,>>>2>,>>> E D9 per unit F D14>,>>>


12-01





5he special e:uipment has no resale5he special e:uipment has no resalevalue and is a sun" cost.value and is a sun" cost.


12-02





0ot avoidable irrelevant. +f the product isdropped, it will be reallocated to other products.


12-0





Should we make or bu part 3)Should we make or bu part 3)


12-0#




%))ortunity Cost

&n &n opportunity costopportunity cost is the benefit that is foregoneis the benefit that is foregone

as a result of pursuing some course of action.as a result of pursuing some course of action.

pportunity costs are not actual dollar outlayspportunity costs are not actual dollar outlays

and are not recorded in the formal accounts ofand are not recorded in the formal accounts of

an organization.an organization.

Gow would this concept potentially relate to theGow would this concept potentially relate to the

+sseA %ompany<+sseA %ompany<

&n &n opportunity costopportunity cost is the benefit that is foregoneis the benefit that is foregone

as a result of pursuing some course of action.as a result of pursuing some course of action.

pportunity costs are not actual dollar outlayspportunity costs are not actual dollar outlays

and are not recorded in the formal accounts ofand are not recorded in the formal accounts of

an organization.an organization.

Gow would this concept potentially relate to theGow would this concept potentially relate to the

+sseA %ompany<+sseA %ompany<


12-00




Connect #n2Class

+Aercise 12- +Aercise 12-9


#-0

A d




Agenda



+valuating a )pecial rder tilization of a %onstrained $esource


12-03

d C




9ey &erms and Conce)ts

3 special order is a onetimeorder that is not considered

part of the compan(s normal

ongoing business.

"hen anal#ing a special

order, onl the incrementalcosts and benefits are

relevant.


12-04

S i l % d




S)ecial %rders

Het, !nc. ma"es a single product whose normal sellingHet, !nc. ma"es a single product whose normal sellingprice is D2> per unit.price is D2> per unit.

& foreign distributor offers to purchase ,>>> units for & foreign distributor offers to purchase ,>>> units for

D1> per unit.D1> per unit.

5his is a one-time order that would not affect the5his is a one-time order that would not affect thecompanycompany==s regular business.s regular business.

&nnual capacity is 1>,>>> units, but Het, !nc. is &nnual capacity is 1>,>>> units, but Het, !nc. is

currently producing and selling only 0,>>> units.currently producing and selling only 0,>>> units.

Het, !nc. ma"es a single product whose normal sellingHet, !nc. ma"es a single product whose normal sellingprice is D2> per unit.price is D2> per unit.

& foreign distributor offers to purchase ,>>> units for & foreign distributor offers to purchase ,>>> units for

D1> per unit.D1> per unit.

5his is a one-time order that would not affect the5his is a one-time order that would not affect thecompanycompany==s regular business.s regular business.

&nnual capacity is 1>,>>> units, but Het, !nc. is &nnual capacity is 1>,>>> units, but Het, !nc. is

currently producing and selling only 0,>>> units.currently producing and selling only 0,>>> units.

Should 4et accept the offer)Should 4et accept the offer)


12-09

S i l % d




S)ecial %rders

D4 variable costD4 variable cost


12->

S i l % d




S)ecial %rders

!f Het accepts the special order, the incremental revenue willeAceed the incremental costs. !n other words, net operating

income will increase by D,>>>. 5his suggests that Hetshould accept the order.

0ote$ This answer assumes that the fi!ed costs areunavoidable and that variable marketing costs must be

incurred on the special order.


12-#

C t # Cl




Connect #n2Class

+Aercise 12-# +Aercise 12-1>


#-0

A d




Agenda

(efinitions!dentification of $elevant %osts

&dding'(ropping a )egment

*a"e or Buy a %omponent+valuating a )pecial rder



12-

9 & d C t




9ey &erms and Conce)ts

"hen a limited resourceof some tpe restricts

the compan(s abilit tosatisf demand, the

compan is said to have

a constraint.

The machine or process

that is limiting overalloutput is called thebottleneck 5 it is the

constraint.

12-3

Utili ti f C t i d R




Utili:ation of a Constrained Resource

7hen a constraint eAists, a company should7hen a constraint eAists, a company shouldselect a product miA that maAimizes the totalselect a product miA that maAimizes the totalcontribution margin earned since fiAed costscontribution margin earned since fiAed costs

usually remain unchanged.usually remain unchanged. & company should not necessarily promote & company should not necessarily promotethose products that have the highest unitthose products that have the highest unitcontribution margin.contribution margin.

$ather, it should promote those products that$ather, it should promote those products thatearn the highest contribution margin in relationearn the highest contribution margin in relationto the constraining resource.to the constraining resource.

7hen a constraint eAists, a company should7hen a constraint eAists, a company shouldselect a product miA that maAimizes the totalselect a product miA that maAimizes the totalcontribution margin earned since fiAed costscontribution margin earned since fiAed costs

usually remain unchanged.usually remain unchanged.

& company should not necessarily promote & company should not necessarily promotethose products that have the highest unitthose products that have the highest unitcontribution margin.contribution margin.

$ather, it should promote those products that$ather, it should promote those products thatearn the highest contribution margin in relationearn the highest contribution margin in relationto the constraining resource.to the constraining resource.

12-4

Utili:ation of a Constrained Resource-




Utili:ation of a Constrained Resource-An "7am)le

+nsign %ompany produces two products andselected data are shown below8

12-9

Utili ation of a Constrained Resource





*achine &1 is the constrained resource and is*achine &1 is the constrained resource and isbeing used at 1>>I of its capacity.being used at 1>>I of its capacity.

5here is eAcess capacity on all other5here is eAcess capacity on all othermachines.machines.

*achine &1 has a capacity of 2,#>> minutes*achine &1 has a capacity of 2,#>> minutesper wee".per wee".

)hould +nsign focus its efforts on)hould +nsign focus its efforts onroduct 1 or roduct 2<roduct 1 or roduct 2<

*achine &1 is the constrained resource and is*achine &1 is the constrained resource and isbeing used at 1>>I of its capacity.being used at 1>>I of its capacity.

5here is eAcess capacity on all other5here is eAcess capacity on all othermachines.machines.

*achine &1 has a capacity of 2,#>> minutes*achine &1 has a capacity of 2,#>> minutesper wee".per wee".

)hould +nsign focus its efforts on)hould +nsign focus its efforts onroduct 1 or roduct 2<roduct 1 or roduct 2<

12-3>

;uic( Chec(




;uic( Chec(

6ow man units of each product can beprocessed through &achine 31 in one minute)

7roduct 1 7roduct 2

a. 1 unit 8.9 unit

b. 1 unit 2.8 units

c. 2 units 1.8 unit

d. 2 units 8.9 unit


7roduct 1 7roduct 2

a. 1 unit 8.9 unit

b. 1 unit 2.8 units

c. 2 units 1.8 unit

d. 2 units 8.9 unit

12-31

;uic( Chec(





7roduct 1 7roduct 2

a. 1 unit 8.9 unit

b. 1 unit 2.8 units

c. 2 units 1.8 unit

d. 2 units 8.9 unit

;uic( Chec(

+ was /ust checking to make sure+ was /ust checking to make sure

ou are with us.ou are with us.

12-32

;uic( Chec(




;uic( Chec(

7hat generates more profit for the company,using one minute of machine &1 to processroduct 1 or using one minute of machine &1 to

process roduct 2<a. roduct 1

b. roduct 2

c. 5hey both would generate the same profit.

d. %annot be determined.

12-3

;uic( Chec(




;uic( Chec(



b. roduct 2





b. roduct 2



"ith one minute of machine 31, we could"ith one minute of machine 31, we couldmake 1 unit of 7roduct 1, with a contributionmake 1 unit of 7roduct 1, with a contribution

margin of :2, or 2 units of 7roduct 2, eachmargin of :2, or 2 units of 7roduct 2, each

with a contribution margin of :19.with a contribution margin of :19.

2 ; :19 < :=8 > :22 ; :19 < :=8 > :2

12-3#






5he "ey is the contribution margin per unit of theconstrained resource.

roduct 2 should be emphasized.roduct 2 should be emphasized. rovides morerovides morevaluable use of the constrained resource machine &1,valuable use of the constrained resource machine &1,

yielding a contribution margin of D> per minute asyielding a contribution margin of D> per minute asopposed to D2# for roduct 1.opposed to D2# for roduct 1.

12-30






!f there are no other considerations, the best!f there are no other considerations, the bestplan would be to produce to meet currentplan would be to produce to meet currentdemand for roduct 2 and then use remainingdemand for roduct 2 and then use remaining

capacity to ma"e roduct 1.capacity to ma"e roduct 1.

5he "ey is the contribution margin per unit of theconstrained resource.

12-3






etet==s see how this plan would wor".s see how this plan would wor".

3lloting %ur Constrained *esource ?&achine 31@

"eekl demand for 7roduct 2 2,288 units

Time re-uired per unit ; 8.98 min.Total time re-uired to make

7roduct 2 1,188 min.

12-33









Total time available 2,88 min.

Time used to make 7roduct 2 1,188 min.Time available for 7roduct 1 1,=88 min.



12-34











Total time available 2,88 min.

Time used to make 7roduct 2 1,188 min.Time available for 7roduct 1 1,=88 min.

Time re-uired per unit A 1.88 min.7roduction of 7roduct 1 1,=88 units

12-39






&ccording to the plan, we will produce 2,2>> units &ccording to the plan, we will produce 2,2>> unitsof roduct 2 and 1,>> of roduct 1. urof roduct 2 and 1,>> of roduct 1. ur

contribution margin loo"s li"e this.contribution margin loo"s li"e this.

7roduct 1 7roduct 2

7roduction and sales ?units@ 1,=88 2,288

Contribution margin per unit 2: 19:Total contribution margin =1,288: ==,888:

5he total contribution margin for +nsign is D#,2>>.5he total contribution margin for +nsign is D#,2>>.

12-4>

;uic( Chec(




;uic( Chec(

%olonial Geritage ma"es reproduction colonial

furniture from select hardwoods.

5he company=s supplier of hardwood will only beable to supply 2,>>> board feet this month. !s this

enough hardwood to satisfy demand<a. Jes

b. o

Chairs Tables

)elling price per unit D4> D#>>Kariable cost per unit D> D2>>Board feet per unit 2 1>

*onthly demand >> 1>>

12-41

;uic( Chec(




%olonial Geritage ma"es reproduction colonial

furniture from select hardwoods.

5he company=s supplier of hardwood will only beable to supply 2,>>> board feet this month. !s this

enough hardwood to satisfy demand<a. Jes

b. o

;uic( Chec(

?2 ; B88@ ?18 ; 188 @ < 2,288 > 2,888

Chairs Tables

)elling price per unit D4> D#>>Kariable cost per unit D> D2>>Board feet per unit 2 1>

*onthly demand >> 1>>

12-42

;uic( Chec(




;uic( Chec(

5he company=s supplier of hardwood will only beable to supply 2,>>> board feet this month. 7hatplan would maAimize profits<

a. 0>> chairs and 1>> tables

b. >> chairs and 4> tablesc. 0>> chairs and 4> tables

d. >> chairs and 1>> tables

Chairs Tables

)elling price per unit D4> D#>>Kariable cost per unit D> D2>>Board feet per unit 2 1>*onthly demand >> 1>>

12-4

;uic( Chec(




;uic( Chec(

5he company=s supplier of hardwood will only beable to supply 2,>>> board feet this month. 7hatplan would maAimize profits<

a. 0>> chairs and 1>> tables

b. >> chairs and 4> tablesc. 0>> chairs and 4> tables

d. >> chairs and 1>> tables

Chairs Tables

)elling price per unit D4> D#>>Kariable cost per unit D> D2>>Board feet per unit 2 1>*onthly demand >> 1>>

Chairs Tables

)elling price 4>D #>>D

Kariable cost > 2>> %ontribution margin 0>D 2>>D

Board feet 2 1>

%* per board foot 20D 2>D

roduction of chairs >> Board feet re:uired 1,2>>

Board feet remaining 4>>

Board feet per table 1>

roduction of tables 4>

12-4#

;uic( Chec(




;uic( Chec(

&s before, %olonial Geritage=s supplier ofhardwood will only be able to supply 2,>>> boardfeet this month. &ssume the company follows theplan we have proposed. p to how much should

%olonial Geritage be willing to pay above theusual price to obtain more hardwood<

a. D#> per board foot

b. D20 per board foot

c. D2> per board footd. Lero






12-40

;uic( Chec(














;uic( Chec(

The additional wood would be used to maketables. +n this use, each board foot of

additional wood will allow the compan to earn

an additional :28 of contribution margin andprofit.

12-4

Managing Constraints




Managing Constraints

Dinding was toprocess more units

through a resourcebottleneck

&t the bottlenec" itself8 &t the bottlenec" itself8M !mprove the process!mprove the process

M &dd overtime or another shift &dd overtime or another shiftM Gire new wor"ers or ac:uireGire new wor"ers or ac:uire

more machinesmore machinesM )ubcontract production)ubcontract production

M $educe amount of defective$educe amount of defectiveunits producedunits produced

M &dd wor"ers transferred from &dd wor"ers transferred from

non-bottlenec" departmentsnon-bottlenec" departments

5he theory of constraints ?5%@ maintains that effectively

managing a constraint is important to the financial successof an organization.

12-43

Connect #n2Class




Connect #n Class

+Aercise 12-0 +Aercise 12-11


#-44

Agenda




Agenda(efinitions

!dentification of $elevant %osts

&dding'(ropping a )egment

*a"e or Buy a %omponent+valuating a )pecial rder



12-49

5oint Costs




5oint Costs

!n some industries, a number of endproducts are produced from a single rawmaterial input.

5wo or more products produced from acommon input are called Noint products Noint products.

5he point in the manufacturing processwhere each Noint product can be

recognized as a separate product iscalled the split-off pointsplit-off point.

!n some industries, a number of endproducts are produced from a single rawmaterial input.

5wo or more products produced from acommon input are called Noint products Noint products.

5he point in the manufacturing processwhere each Noint product can be

recognized as a separate product iscalled the split-off pointsplit-off point.

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5oint 3roducts




5oint 3roducts

Hoint!nput

%ommon

roductionrocess

Split%ff Split%ff

7oint7oint

il

Oasoline

%hemicals

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5oint 3roducts




5oint 3roducts

)eparaterocessing

)eparaterocessing

DinalSale

Dinal

Sale

/inal)ale

SeparateSeparate

7roduct7roduct

CostsCosts

Hoint!nput

%ommon

roductionrocess

Split%ff Split%ff

7oint7oint

4oint4ointCostsCosts il

Oasoline

%hemicals

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&he 3itfalls of Allocation




&he 3itfalls of Allocation

Hoint costs are oftenHoint costs are oftenallocated to end products onallocated to end products on

the basis of thethe basis of the relativerelative

sales valuesales value of each productof each product

or on some other basis.or on some other basis.

&lthough allocation is needed for &lthough allocation is needed forsome purposes such as balancesome purposes such as balance

sheet inventory valuation,sheet inventory valuation,allocations of this "ind areallocations of this "ind are veryverydangerousdangerous for decision ma"ing.for decision ma"ing.

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Sell or 3rocess urther




Hoint costs are irrelevant in decisions regardingHoint costs are irrelevant in decisions regarding

what to do with a product from the split-off pointwhat to do with a product from the split-off pointforward.forward.

!t will always be profitable to continue processing a!t will always be profitable to continue processing a

Noint product after the split-off point Noint product after the split-off point so long asso long asthe incremental revenue eAceeds thethe incremental revenue eAceeds the

incremental processing costs incurred after theincremental processing costs incurred after the

split-off pointsplit-off point..


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Sell or 3rocess urther- An "7am)le




Sell or 3rocess urther- An "7am)le

)awmill, !nc. cuts logs from which unfinished)awmill, !nc. cuts logs from which unfinishedlumber and sawdust are the immediate Nointlumber and sawdust are the immediate Noint

products.products.

nfinished lumber is soldnfinished lumber is sold ““as isas is”” or processedor processed

further into finished lumber.further into finished lumber. )awdust can also be sold)awdust can also be sold ““as isas is”” to gardeningto gardening

wholesalers or processed further intowholesalers or processed further into ““presto-presto-

logs.logs.””

)awmill, !nc. cuts logs from which unfinished)awmill, !nc. cuts logs from which unfinishedlumber and sawdust are the immediate Nointlumber and sawdust are the immediate Noint

products.products.

nfinished lumber is soldnfinished lumber is sold ““as isas is”” or processedor processed

further into finished lumber.further into finished lumber. )awdust can also be sold)awdust can also be sold ““as isas is”” to gardeningto gardening

wholesalers or processed further intowholesalers or processed further into ““presto-presto-

logs.logs.””

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Se o ocess u e

(ata about )awmill=s Noint products includes8

Increase in reven%e&increase in costs& 'er Lo

L%()er Sa*+%stSales val%e at t!e s"lit,o- "oint #./0 ./0Sales val%e after f%rt!er "rocessin $1/ 2/ Allocate+ 3oint "ro+%ct costs #14 $. Cost of f%rt!er "rocessin 2/ $/

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3nalsis of Sell or 7rocess Durther

7er 'og 'umber Sawdust

Sales value after further processing 2E8: 98:

Sales value at the splitoff point 18 8

+ncremental revenue 1=8 18

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+ncremental revenue 1=8 18 Cost of further processing 98 28 7rofit ?loss@ from further processing F8: ?18@:

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+ncremental revenue 1=8 18 Cost of further processing 98 28 7rofit ?loss@ from further processing F8: ?18@:

)hould we process the lumber further )hould we process the lumber further

and sell the sawdustand sell the sawdust ““as is<as is<””

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Connect #n2Class




+Aercise 12- +Aercise 12-12


12-1>>

"nd of Cha)ter *+



)

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Ch12 ACCG20478 (Cost 2) ppt MM