1. Managerial Accounting: An Introduction To Concepts, Methods, And Uses Chapter 7 Differential Cost Analysis for Operating Decisions Maher, Stickney and Weil

2. Learning Objectives (Slide 1 of 3)  Explain the differential principle & know how to identify costs for differential analysis.  Explain the relation between costs & prices.  Explain how to base target costs on target prices.  Describe how to use differential analysis to measure customer profitability.

3. Learning Objectives (Slide 2 of 3)  Explain why businesses apply differential analysis to product choice decisions.  Explain the theory of constraints.  Identify the factors underlying make-or- buy decisions.  Explain how to identify the costs of producing joint products & the relevant costs for decisions to sell or process further.

4. Learning Objectives (Slide 3 of 3)  Explain the use of differential analysis to determine when to add or drop parts of operations  Identify the factors of inventory management decisions.  Explain how linear programming optimizes the use of scare resources (Appendix 8.1)  Identify the use of the economic order quantity model (Appendix 8.2)

5. Describe & Define Differential Analysis

6. Differential Analysis Model Alternative -Status Quo =Difference Revenue Change in Revenue Less Variable Costs (VC) VC -VC = Change in VC Total Contribution Margin (CM) CM Change in CM Less Fixed Costs Fixed Costs -Fixed Costs = Change in Fixed Costs Operating Profit Profit -Profit = Change in Profit

7. Differential Analysis Cont.  A cost (or revenue) is relevant only if it differs between alternatives under consideration  Focus is typically on cash flows because:  Cash is the medium of exchange  Cash is a common, objective measure of benefits and costs of alternatives

8. What are the three major influences on pricing?

9. Review Short-Run vs. Long- Run Pricing Decisions  Time horizon of a decision is important in determining relevant costs in a pricing decision  Short-run decisions include pricing for a one-time special order  Long-run decisions include pricing a main product in a major market

10. What is the differential approach to pricing?

11. Long-Run Pricing Decisions (Slide 1 of 3)  Define Full cost

12. Review the Value Chain

13. Long-Run Pricing Decisions (Slide 3 of 3)  Full cost approach is justified in pricing decisions when:  Entering into long-term contracts to supply a product  Developing and producing a customized product  Initially setting prices, then adjusting for market conditions

14. Review Life-Cycle Product Costing and Pricing

15. Explain Using Target Prices to Set Target Costs

16. Explain Legal Issues Relating Costs to Prices

17. Customer Profitability  Differential analysis is useful in determining which customers to keep or drop  Dropping a customer should result in cost savings in excess of lost revenue  Alternative uses of extra capacity available after dropping a customer should be included in the analysis

18. What are the four general categories of customer costs? Customer costs generally consist of the following 4 categories of activities: ABC provides a better understanding of the cost of these activities

19. Build a Chart of Activities to Compute Customer Costs

20. Comment on Decisions when Scarce Resources are Limited

21. Decisions with Scarce Resources

22. Define the Following  Theory of Constraints  Bottleneck  Throughput Contribution

23. List the Five Steps to Managing Bottlenecks

24. Name Three Options to Relieve a Bottleneck

25. Explain Make or Buy Decisions

26. Define the Following  Split-Off Point  Joint Costs  Additional Processing Costs

27. How do you decide whether to process further or not?

28. If you have any comments or suggestions concerning this PowerPoint Presentation for Managerial Accounting, An Introduction To Concepts, Methods, And Uses, please contact: Dr. Michael Blue, CFE, CPA, CMA blue@bloomu.edu Bloomsburg University of Pennsylvania