1. Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fourth Edition Wild, Shaw, and Chiappetta Fourth Edition McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter 23 Relevant Costing for Managerial Decisions

3. Conceptual Learning Objectives C1: Describe the importance of relevant costs for short-term decisions. 23-3

4. A1: Evaluate short-term managerial decisions using relevant costs. A2: Determine product selling price based on total costs. Analytical Learning Objectives 23-4

5. P1: Identify relevant costs and apply them to managerial decisions Procedural Learning Objectives 23-5

6. Decision making involves five steps:  Define the task and the goal.  Identify alternative actions.  Collect relevant information on alternatives.  Select the course of action.  Analyze and assess decision. Decision Making C 1 23-6

7. Costs that are applicable to a particular decision. Costs that should have a bearing on which alternative a manager selects. Costs that are avoidable. Future costs that differ between alternatives. 1 2 Relevant Costs C 1 23-7

8. All costs incurred in the past that cannot be changed by any decision made now or in the future. Sunk costs should not be considered in decisions. All costs incurred in the past that cannot be changed by any decision made now or in the future. Sunk costs should not be considered in decisions. Classification by Relevance: Sunk Costs Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost. C 1 23-8

9. Future outlays of cash associated with a particular decision. Example: Considering the decision to take a vacation or stay at home, you will have travel costs (out-of-pocket costs) only if you choose a vacation. Classification by Relevance: Out-of-Pocket Costs C 1 23-9

10. The potential benefit that is given up when one alternative is selected over another. Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000. Classification by Relevance: Opportunity Costs C 1 23-10

11. The decision to accept additional business should be based on incremental costs and incremental revenues. Incremental amounts are those that occur if the company decides to accept the new business. Accepting Additional Business A1 23-11

12. Incremental costs also are important in the decision to make a product or purchase it from a supplier. The cost to produce an item must include (1) direct materials, (2) direct labor and (3) incremental overhead. We should not use the predetermined overhead rate to determine product cost. Make or Buy Decisions A1 23-12

13. Costs incurred in manufacturing units of product that do not meet quality standards are sunk costs and cannot be recovered. As long as rework costs are recovered through sale of the product, and rework does not interfere with normal production, we should rework rather than scrap. Scrap or Rework A1 23-13

14. Businesses are often faced with the decision to sell partially completed products or to process them to completion., As a general rule, we process further only if incremental revenues exceed incremental costs. Sell or Process A1 23-14

15. When a company sells a variety of products, some are likely to be more profitable than others. To make an informed decision, management must consider... The contribution margin of each product, The facilities required to produce each product and any constraints on the facilities, and The demand for each product. Sales Mix Selection A1 23-15

16. Qualitative factors are involved in most all managerial decisions. For example: Quality. Delivery schedule. Supplier reputation. Employee morale. Customer opinions. Qualitative Factors in Decisions A1 23-16

17. Setting Product Prices A2 Relevant costs are useful to management to assist in determining prices for special short- term decisions. However, long run pricing decisions also need to cover both variable and fixed costs. The “cost plus” method, where management adds a mark- up to the costs to reach a target price is most common 23-17

18. End of Chapter 23 23-18