Day 14 In class

Today Are all cost allocations arbitrary? Joint cost allocation Irrelevance of Post-split-off decision making Why allocate at all? Flexible budgets and performance evaluation Comparing the Flexible Budget to Actuals Comparing the Master & Flexible Budgets

Today Are all cost allocations arbitrary? Joint cost allocation Irrelevance of Post-split-off decision making Why allocate at all? Flexible budgets and performance evaluation Comparing the Flexible Budget to Actuals Comparing the Master & Flexible Budgets

Are all cost allocations arbitrary? Yes …

Joint cost allocation Irrelevant Why? Why do we do it then? What should we do?

Post-split-off decision making Produce profit maximizing bundle of output How to identify? Compare post-split-off costs to incremental revenues Can we control the mix? How hard do we press the fruit? Oranges, olives, grapes …

Why allocate at all? People like doing silly things Changing the system is costly We want managers to internalize price signals

Flexible budgets and performance evaluation Comparing the Flexible Budget to Actuals Price variance Actual Output * Expected Price/Unit minus Actual Output * Actual Price/Unit Efficiency Variance Actual Output * Expected Consumption/Unit * Expected Price/Unit of Input minus Actual Output * Actual Consumption/Unit * Expected Price/Unit of Input

Comparing the Master & Flexible Budgets Variable costs will differ by the amount of the expected cost of the volume of units over or under-produced Fixed costs will not change … This is a pure volume (activity) variance.