1. Day 14
In class

2. 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

3. 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

4. Are all cost allocations arbitrary?
Yes …

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

6. 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 …

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

8. 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

9. 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.