Differential Cost Analysis

Slides:



Advertisements
Similar presentations
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 4 Short-term Decision Making.
Advertisements

Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fourth Edition Wild, Shaw, and Chiappetta Fourth Edition McGraw-Hill/Irwin Copyright © 2011.
Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fifth Edition Wild, Shaw, and Chiappetta Fifth Edition McGraw-Hill/Irwin Copyright © 2013.
Decision Making and Relevant Information
McGraw-Hill/Irwin Slide 1 McGraw-Hill/Irwin Slide 1 Capital budgeting: Analyzing alternative long- term investments and deciding which assets to acquire.
CHAPTER 6 INCREMENTAL ANALYSIS Study Objectives
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Chapter 10 Relevant Information and.
(c) 2002 Contemporary Engineering Economics 1 Chapter 3 Cost Concepts and Behaviors General Cost Terms Classifying Costs for Financial Statements Cost.
Relevant Costs for Decision Making. Identifying Relevant Costs Costs that can be eliminated (in whole or in part) by choosing one alternative over another.
© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 21-1 INCREMENTAL ANALYSIS Chapter 21.
Relevant Costs for Decision Making Chapter 13. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Cost Concepts for Decision Making A relevant.
Relevant Costing for Managerial Decisions
Introduction to Management Accounting Introduction to Management Accounting C H A P T E R 1.
Inventory Costing and Capacity Analysis
Copyright © 2007 Prentice-Hall. All rights reserved 1 Special Business Decisions and Capital Budgeting Chapter 25.
Classification of Costs
26 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Chapter 26 Special Business Decisions and Capital Budgeting.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Relevant Information and Decision.
(c) 2002 Contemporary Engineering Economics 1 Chapter 3 Cost Concepts and Behaviors General Cost Terms Classifying Costs for Financial Statements Cost.
CHAPTER 5 SUPPLY.
20 Variable Costing for Management Analysis
Chapter 6 Cost of Production.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
The Master Budget and Flexible Budgeting
Principles of Cost Accounting 15 th edition Edward J. VanDerbeck © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated,
Supply Chapter 5.
Accounting Principles, Ninth Edition
Financial and Managerial Accounting John J. Wild Third Edition John J. Wild Third Edition McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies,
Chapter 26 Part 1.
Short-Run Decision Analysis 27. Short-Run Decision Analysis and the Management Process OBJECTIVE 1: Descibe how managers make short-run decisions using.
PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a.
Relevant Cost Decisions DECISION MAKING IN THE SHORT TERM.
Supply Chapter 5 Section 2.
Chapter 4 Solutions. Exercise 4-5A Since the product- and facility-sustaining costs do not differ between the alternatives, they are not avoidable. The.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Chapter 10 Cost Analysis for Management Decision Making.
Objective 1 Define Opportunity Cost and Use it to Analyze the Income Effects of a Given Alternative
Chapter 25 Short-Term Business Decisions
9 Differential Analysis and Product Pricing Managerial Accounting 13e
Contemporary Engineering Economics Contemporary Engineering Economics, 5 th edition, © 2010.
Lesson Objectives: By the end of this lesson you will be able to: *Explain how firms decide how much labor to hire in order to produce a certain level.
1 CHAPTER 15 SHORT-TERM PLANNING DECISIONS. 2 Chapter Overview  How do relevant costs and revenues contribute to sound decision making?  What type of.
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 29 Relevant Costing for Managerial Decisions.
Differential Cost Analysis
Differential Analysis and Product Pricing Chapter 12.
AC239 Managerial Accounting Seminar 9 Jim Eads, CPA, MST, MSF Differential Analysis and Product Pricing 1.
Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fourth Edition Wild, Shaw, and Chiappetta Fourth Edition McGraw-Hill/Irwin Copyright © 2011.
© 2012 Pearson Prentice Hall. All rights reserved. Using Costs in Decision Making Chapter 3.
Chapter 4 Short-Term Decision Making Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D.,
1 Chapter 16 Relevant Costs and Benefits for Decision Making.
Crosson Needles Managerial Accounting 10e Short-Run Decision Analysis 9 C H A P T E R © human/iStockphoto ©2014 Cengage Learning. All Rights Reserved.
6 - 1 Chapter 6 Relevant Information and Decision Making: Production Decisions.
Prepared by Diane Tanner University of North Florida ACG Incremental Analysis 3-1.
© 2012 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
Chapter Five: Supply 12 th Grade Economics Mr. Chancery.
Classification of Costs
Cost Analysis for Management Decision Making
Cost Analysis for Management Decision Making
Chapter 5: Supply Section 2
Relevant Cost Decisions
Demonstration Problem
Short-term Decision Making
Marginal costing and short term decision making
Short-term Decision Making
Chapter 24 Differential Analysis and Product Pricing Student Version
Chapter 5: Supply Section 2
Chapter 5: Supply Section 2
Chapter 5: Supply Section 2
Cost Accounting for Decision-making
Presentation transcript:

Differential Cost Analysis Chapter 25

Management decisions Accepting/Rejecting certain orders Reducing the price of a single order Making a price cut in a competitive market Evaluating Make-or-buy alternatives Expanding or reducing plant capacity Increasing, curtailing or stopping production Replacing present equipment Spending additional amounts for sales promotion

Differential Cost Difference between cost of alternative choices Marginal/Incremental cost Deals with determination of incremental revenue, costs and margins Variable costs are significant Fixed costs might be included

Example Total cost at 60,000 units = $324,250 Calculate total differential cost Calculate differential cost/unit

Solution Differential cost = 423,400 – 324,250 = $99,150 Differential cost/unit = 99,150/20,000 = $4.96

Accepting Additional Orders Differential cost must be considered involving a change in output Difference between the cost of producing present smaller output and that of the planned larger output Possibility of selling additional output at a figure lower or greater than the existing average unit cost New or additional business can be accepted as long as the variable cost is recovered

Example Maximum capacity=100,000 units Normal capacity = 80,000 units Variable cost per unit = $5 Fixed cost= $100,000 Sales price per unit= $9 Profit at 80,000 and 81,000 units?

Solution Present business Additional business Total Sales $720,000 $9,000 $729,000 Variable cost 400,000 5,000 405,000 Contribution Margin 320,000 4,000 324,000 Fixed cost 100,000 _-0-____ 100,000 Profit 320,000 4,000 224,000

Reducing the Price of a Special Order At what minimum price the firm can afford to sell additional goods

Example Company manufactures 450,000 units using 90% of its capacity Fixed factory overhead is $335,000 Variable factory overhead = $0.50/unit Direct materials = $1.80/unit Direct labor = $1.40/unit Each unit sells for $5

Example Sales $2,250,000 Cost of goods sold: Direct materials(450,000*1.80) 810,000 Direct labor(450,000*1.40) 630,000 Variable factory overheads(450,000*0.50) 225,000 Fixed factory overheads(450,000*0.67) 301,500 1,966,500 Income from operations 283,500 Unabsorbed fixed factory overheads(500,000-450,000)*0.67] 33,500 Income from operations (adjusted) 250,000

Special Order Additional fixed cost if special order of 100,000 units is accepted = $10,000 Sales price of a special order=$4.25

Solution Sales (100,000 units@4.25) $425,000 Cost of goods sold: Direct materials(100,000units @1.80) 180,000 Direct labor (100,000units @ 1.40) 140,000 Variable factory overheads (100,000 units @0.50) 50,000 Additional fixed cost 10,000 380,000 Gain on the order $45,000

Exercise The wood River plant of the Union Company has a normal capacity 0f 90,000 units per month. Monthly production costs are $12 variable cost per unit and $240,000 fixed. By increasing the fixed cost $10,000 a month, the plant can produce 95,000 units. Differential cost of the production between 80% and 90% of normal capacity. Differential cost of producing the 5,000 units above the normal capacity. Per unit total production cost of the 95,000 units Per unit differential production cost of the 5,000 units.

Solution Differential cost of the production between 80% and 90% of normal capacity. 90,000 units *90% 81,000 units 90,000 units *80% 72,000 units 9,000 units 9,000 units *$12 = $108,000

Solution Differential cost of producing the 5,000 units above the normal capacity. 5,000 units *12 $60,000 Differential Fixed cost 10,000 70,000

Solution Per unit total production cost of the 5,000 units Fixed costs(240,000+10,000) 250,000 1,390,000

Solution Per unit differential production cost of the 5,000 units. = $14

Make-Or-Buy Decisions Compare the cost of making the parts with the cost of buying them Costs for each of the alternatives must be based on the identical product specifications, quantities and quality standards

Decisions to Shut Down Facilities In the short run, a firm seems to be better off operating than not operating if revenue > variable costs Shutting down of facilities Does not eliminate all costs Loss of investment spent on training employees Recruiting and training costs after reopening Loss of losing established markets & customers

Decisions to Shut Down Facilities If operations are continued Certain expenses connected with the shutting down of the facilities can be saved Costs that would have to be incurred when a closed facility is reopened will be saved

Decisions to Discontinue Products Requires careful analysis of relevant differential cost and revenue data Following benefits can be achieved with the correct decision: Expanded sales Increased profits Reduced inventory levels Resources made available for more promising projects

Decisions to Discontinue Products Not only the profitability of the products being analyzed be considered but also the extent to which sales of other products will be affected when one product is removed should be evaluated

Decisions to Discontinue Products Management needs following signals to identify troubled products: Declining sales volume Decreasing market share Malfunctioning of the product or introduction of a superior competitive product Expected future sales and market potential not favorable Return on investment below minimum acceptable level Variable costs approaching or exceeding revenue Price required to be constantly lowered to maintain sales

Other Cost Concepts Opportunity costs Imputed costs Measurable value of an opportunity bypassed by rejecting an alternative use to resources Measurement of sacrifices associated with alternatives Imputed costs Hypothetical costs representing the cost/value of a resource measured by its use value Interest on invested capital, rental value of company-owned properties, salaries of owners of sole proprietors Do not involve actual cash flows

Other Cost Concepts Out-Of-Pocket Costs Sunk Costs Involves cash outlays Often identified as variable costs Helpful in deciding whether a particular venture will at least return the cash expenditures Sunk Costs Irrecoverable costs Not included in differential cost analysis