acct2121 chapter11
TRANSCRIPT
-
7/21/2019 ACCT2121 Chapter11
1/44
(c) 2012 Pearson Prentice Hall. All rights reserved.
Chapter 11
11-1
-
7/21/2019 ACCT2121 Chapter11
2/44
A. Objectives / Expected Learning Outcomes
(Course Outline)1. Chapter 11 !elevant "n#ormation $ecision %a&ing
'. A#ter studing this Chapter ou should be able to %aster the !elevant Costs Concepts and appl the
&no*ledge to manu#acturing merchandising andservice companies.
+se the in#ormation #rom management accountingsstems to improve the competitiveness o# thecompanies in operational excellence productleadership (product mix next slide) and customerservice.
$evelop s&ills and abilit to solve problems thatthe *ill need to succeed in a business
environment.11-2
-
7/21/2019 ACCT2121 Chapter11
3/44
-
7/21/2019 ACCT2121 Chapter11
4/44
$. Learning Activities1. Lecture (sharing o# &e concepts and ideas)
'. $iscussions (sharing b students)
6. Available -echnolog (visual presenter 7 - 7 Clic&er)
E. Assessment1. "n Class Exercise (Clic&er) %C 8ormat
'. 9: Assignment (in %C 8ormat Openended ;uestion8ormat and Essa 8ormat)
11-4
-
7/21/2019 ACCT2121 Chapter11
5/44
1. +se the #ivestep decisionma&ing process
'. $istinguish relevant #rom irrelevantin#ormation in decision situations
6. Explain *h managers should consider thecosts *hen ma&ing insourcingversusoutsourcing decisions
3.
-
7/21/2019 ACCT2121 Chapter11
6/44
. $iscuss the #actors managers must consider*hen adding or dropping customers orbusiness units
4. Explain *h boo& value o# e2uipment isirrelevant to managers ma&ing e2uipmentreplacement decisions
=. Explain ho* con#licts can arise bet*een the
decision model a manager uses and theper#ormanceevaluation model topmanagement uses to evaluate managers
11-6
-
7/21/2019 ACCT2121 Chapter11
7/44
%anagers usuall #ollo* a decision model #orchoosing among di##erent courses o# action.
A decision model is a #ormal method o# ma&ing achoice that o#ten involves both 2uantitative and2ualitative analses.%anagement accountants anal>e and presentrelevant data to guide managers? decisions.%anagers use the #ivestep decisionma&ingprocess presented in Chapter 1 (slide 1) to ma&edecisions.
11-7
-
7/21/2019 ACCT2121 Chapter11
8/4411-8
-
7/21/2019 ACCT2121 Chapter11
9/44
!elevant in#ormation has t*o characteristics "t occurs in the #uture
"t di##ers among the alternative courses o#action.
!elevant costs (slide 11) are expected #uturecosts.
!elevant revenues (slide 11) are expected
#uture !evenues. ast costs (historical costs) are never
relevant and are also called sun& costs (slide16).
11-
-
7/21/2019 ACCT2121 Chapter11
10/44
;uantitative #actors are outcomes that canbe measured in numerical terms.
;ualitative #actors are outcomes that are
di##icult to measure accuratel in numericalterms such as satis#action.;ualitative #actors are just as important as
2uantitative #actors even though the aredi##icult to measure.
11-10
-
7/21/2019 ACCT2121 Chapter11
11/44
ast (historical) costs ma be help#ul as a basis #or ma&ingpredictions. 9o*ever past costs themselves are al*asirrelevant *hen ma&ing decisions.
$i##erent alternatives can be compared b examiningdi##erences in expected total #uture revenues and
expected total #uture costs. @ot all expected #uture revenues and expected #uture
costs are relevant. Expected #uture revenues andexpected #uture costs that do not di##er among
alternatives are irrelevant and hence can be eliminated#rom the analsis (see next slide). -he &e 2uestion isal*as :hat di##erence *ill an action ma&e
;uantitative and 2ualitative #actors should be considered.
11-11
-
7/21/2019 ACCT2121 Chapter11
12/4411-12
-
7/21/2019 ACCT2121 Chapter11
13/44
Costs that have alread occurred and cannot bechanged are classi#ied as sun& costs.
0un& costs are excluded (slide 5) because thecannot be changed b #uture actions.
11-13
-
7/21/2019 ACCT2121 Chapter11
14/44
"ncremental cost (slide 1=) B the additionaltotal cost incurred #or an activit.
$i##erential cost B the di##erence in totalcost bet*een t*o alternatives.
"ncremental revenue B the additional totalrevenue #rom an activit.
$i##erential revenue B the di##erence in totalrevenue bet*een t*o alternatives.
@ote that incremental cost and di##erentialcost are sometimes used interchangeabl inpractice.
11-14
-
7/21/2019 ACCT2121 Chapter11
15/44
1. Onetimeonl special orders (slide 1415)
'. "nsourcing vs. Outsourcing (%a&eor,u)(slide ''3)
6. roductmix *ith capacit constraints (slide''D)
3. Customer ro#itabilit and !elevant Costs(slide '566)
. ,ranch / 0egment adding or discontinuing(slide 63)
4. E2uipment !eplacement (slide 631)
11-15
-
7/21/2019 ACCT2121 Chapter11
16/44
Accepting or rejecting special orders *henthere is production capacit and thespecial orders have implications.
$ecision rule $oes the special ordergenerate additional operating incomeFesBaccept
@oBreject Compares relevant revenues and relevant
costs (slide 5) to determine pro#itabilit.
11-16
-
7/21/2019 ACCT2121 Chapter11
17/44
,ac&ground "n#ormation A customer o##ers topurchase units at G11 per unit *hich is G5less than the usual selling price.
;uestion 0hould the special order be accepted -hings to note
1. $ecision !ule $oes the special ordergenerate additional operating income
"# es then accept the special order.'. -he onl incremental costs (slide 13) arethe manu#acturing costs.
11-17
-
7/21/2019 ACCT2121 Chapter11
18/4411-18
-
7/21/2019 ACCT2121 Chapter11
19/44
$iscussion / !esult$ecision !ule $oes the special order generateadditional operating income "# es then
accept the special order.
1. Column $ Operating "ncome G6.
'. Column 8 Operating "ncome G3= i# thespecial order is accepted.
6. Column 9. $i##erence G1=.3. Henerate operating income.
. the special order.
11-1
-
7/21/2019 ACCT2121 Chapter11
20/44
"nsourcing means ou?ll produce the good (orprovide the service) *ithin the organi>ation.
Outsourcing is purchasing goods and services
#rom outside vendors. $ecisions about *hether to insource or
outsource are called %a&eor,u decisions.
11-20
-
7/21/2019 ACCT2121 Chapter11
21/44
$ecision rule 0elect the option that *illprovide the #irm *ith the lo*est cost andthere#ore the highest pro#it.
0ame as special order choose thealternative that maximi>es operatingincome.
11-21
-
7/21/2019 ACCT2121 Chapter11
22/44
,ac&ground "n#ormation A compan needs ' units o#a good produced in ' batches o# 1' units each.
-he compan could purchase the good #or G43 per unit.
;uestion 0hould the compan ma&e or bu the good
-hings to note
1. Consider the manu#acturing costs ($irect %aterials%anu#acturing Overhead Cost). (-otal Amount 1
million dollar) #or ma&ing the product.'. Consider 14 million dollar (' units x G43selling price) #or purchasing / buing.
11-22
-
7/21/2019 ACCT2121 Chapter11
23/44
11-23
Total RelevantCosts
RelevantCost Per
Unit
Relevant Items Make Buy Make Buy
Outside purchase of parts ($64 * 250,000units)
$16,000,000 $64
Direct materials$9,000,00
0 $6
Direct manufacturin! la"or$2,500,00
0 $10
#aria"le manufacturin! oerhead$1,500,00
0 $6
%i&ed (aria"le and '&ed) materials handlin! and setup oerhead
$2,000,000 $
otal releant costs (a)$15,000,0
00$16,000,0
00 $60 $64
Di+erence in faor of main! D#D pla-ers $1,000,000 $4
(a) he $,000,000 of plantlease, plantinsurance, and plantadministrationcosts could "e included under "oth alternaties. /once tuall , the do not
-
7/21/2019 ACCT2121 Chapter11
24/44
$iscussion / !esult
$ecision rule 0elect the option that *ill provide the #irm*ith lo*est cost and there#ore the highest ro#it.
1. :e see an analsis o# the relevant costs #or thisdecision (G1 million vs G14 million).
'. 0ince it costs to ma&e the item there#oreproduction should remain inhouse.
6. As *ith special order decision strategic and2ualitative #actors cannot be ignored.
3. Also regardless o# this #inancial outcome perhaps thecompan pre#ers to retain inhouse control over2ualit issue.
11-24
-
7/21/2019 ACCT2121 Chapter11
25/44
roductmix decisions are decisions managersma&e about *hich product to sell and in *hat2uantities.
$ecision rule (*ith a constraint)Choose the product that produces the
highest contribution margin per unit o#the constraining resource (see exampleon next slide) (not the highestcontribution margin per unit o# theproduct).
11-25
-
7/21/2019 ACCT2121 Chapter11
26/44
,ac&ground "n#ormation -*o products (roduct A and roduct ,).
%achine hour is limitedI there#ore machine hour is the resources.
;uestion :hich product (A or ,) ma maximi>e thecompan?s pro#it
-hings to note
1. Consider the contribution margin per unit o#
the constraining resource(i.e. )
11-26
-
7/21/2019 ACCT2121 Chapter11
27/44
Product A Product B
0elling rice G1. G6.
Jariable Cost per unit G 4. G1.
Contribution %argin / +nit (Ch. 6) G 3. G1.
Contribution %argin ercentage (Ch. 1) 3K K
%achine 9ours re2uired per unit . 6.
Contribution %argin / %achine 9our G D. G .
11-27
-
7/21/2019 ACCT2121 Chapter11
28/44
$iscussion / !esult$ecision rule Choose the product that produces thehighest contribution margin per unit o# theconstraining resource.
1. roduct A C% per unit G3
roduct , C% per unit G1
'. Constraining !esource is the %achine 9our.
6. %achine 9our re2uired per unit is . and 6 #orroduct A and , respectivel.
3. roduct A C% per machine hour G3/. GD
roduct , C% per machine hour G1/6 G
. roduce roduct to maximi>e the pro#it. 11-28
-
7/21/2019 ACCT2121 Chapter11
29/44
:hen the cost object (Chapter ') is acustomer managers must decide aboutadding or dropping the customer.
$ecision rule $oes adding or dropping acustomer add operating income to the #irm
11-2
-
7/21/2019 ACCT2121 Chapter11
30/44
,ac&ground "n#ormation
-he Compan #aces the 2uestion o# *hether ornot it should drop Customer C *ho appears tohave a negative impact on operating income
(see next slide).-he are also considering adding a Customer
$ *ho have the same revenues and costs asCustomer C plus the re2uirement o# additional
e2uipment *ith G5 depreciation (see slide6'). Also !ent Heneral Administration Costand Corporate O##ice Costs *ill not change (seeslide 6').
11-30
-
7/21/2019 ACCT2121 Chapter11
31/44
11-31
/ustomer 3 / otal
eenues $500,000$00,0
00$400,00
0$1,200,0
00
/ost of !oods sold 0,000
220,00
0 0,000 920,000urniturehandlin! la"or 41,000 1,000 ,000 92,000
urniturehandlin! e7uipmentcost ritteno+ as depreciation 12,000 4,000 9,000 25,000
ent 14,000 ,000 14,000 6,000
%aretin! support 11,000 9,000 10,000 0,000
8alesorder and delier-processin! 1,000 ,000 12,000 2,000
eneral administration 20,000 12,000 16,000 4,000
llocated corporateo:ce costs 10,000 6,000 ,000 24,000
otal costs 491,00024,00
0 42,0001,20,00
0
$16,00 ($2,00
-
7/21/2019 ACCT2121 Chapter11
32/44
11-32
(;ncremental
-
7/21/2019 ACCT2121 Chapter11
33/44
$iscussion / !esult
1. Loo&ing at this relevant revenues / relevant costanalsis *e see that dropping the C account *ouldactuall operating income b G1.
'. Adding the $ account *ill operating income G4.
6. @ote that #or $ !ental Cost Heneral AdministrationCost and Corporate O##ice Cost are not relevantbecause the don?t change *hether or not $ is
added (bac&ground in#ormation slide 6). On theother hand the additional costis relevant #or $ since the G5 *ill onl occur i#that customer is added.
11-33
-
7/21/2019 ACCT2121 Chapter11
34/44
$ecision rule $oes adding or discontinuing abranch or segment add operating income to the
#irm
11-34
-
7/21/2019 ACCT2121 Chapter11
35/44
0ometimes di##icult due to amount o#in#ormation at hand that is irrelevantCost accumulated depreciation and boo& value
o# existing e2uipment
An potential gain or loss on the transaction B a#inancial accounting phenomenon onl.
$ecision rule 0elect the alternative that *illgenerate the highest operating income.
11-35
-
7/21/2019 ACCT2121 Chapter11
36/44
11-36
Old machine >e machineOri!inal cost $1,000,000 $600,000
?seful life 5 -ears 2 -ears
/urrent a!e -ears 0 -ear
emainin! useful life 2 -ears 2 -ears
ccumulated depreciation $600,000 >ot ac7uired-et
3oo alue $400,000>ot ac7uired
-et
/urrent disposal alue (in cash) $40,000>ot ac7uired
-et
erminal disposal alue (in cash, 2 -earsfrom no) $0 $0
nnual operatin! costs (maintenance,ener!-, repairs, coolants, and so on) $00,000 $460,000
-
7/21/2019 ACCT2121 Chapter11
37/44
,ac&ground "n#ormation-he Compan uses straight line
depreciation.-he Compan *ill ma&e a decision about
*hether or not to replace e2uipment.
11-37
-
7/21/2019 ACCT2121 Chapter11
38/44
11-38
Two Years Together
@eep(1)
eplace(2)
Di+erence
()A(1)(2)
eenues $2,200,000 $2,200,000 0
Operatin! costs/ash operatin! costs ($00,000 B -ear *2 -earsC $460,000 B -ear * 2 -ears) 1,600,000 920,000 60,000
3oo alue of old machine
eriodic riteo+ as depreciation or 400,000 0 400,000
e machine cost, ritten o+periodicall- as depreciation 0 600,000
(600,000)
otal operatin! costs 2,000,000 1,0,000 120,000
Operatin! income $200,000 $20,000
($120,00
0)
-
7/21/2019 ACCT2121 Chapter11
39/44
11-3
Mournal Entr
$iscussion / !esult$ecision rule 0elect the alternative that *illgenerate the highest operating income.
1. !eplacing the machine *ill operating income b G1'.
'. @o* let?s ta&e a loo& at the relevant cost onl(next slide) and see i# it gives the same decision.
-
7/21/2019 ACCT2121 Chapter11
40/44
-
7/21/2019 ACCT2121 Chapter11
41/44
9ere *e see the analsis sho*ing relevantcosts (previous slide) onl.
$iscussion / !esult$ecision rule 0elect the alternative that *illgenerate the highest operating income.
1. !eplacing the machine *ill operating income b G1'.
'. "t gives us the decision even thoughjust loo&ing at the relevant costs.
11-41
-
7/21/2019 ACCT2121 Chapter11
42/44
11-42
-
7/21/2019 ACCT2121 Chapter11
43/44
TERMS TO LEARN PAGE NUMBER REFERENCE
,oo& value age 33D
,usiness #unction costs age 3'5
Constraint age 3
$ecision model age 3'$i##erential cost age 366
$i##erential revenue age 363
11-43
-
7/21/2019 ACCT2121 Chapter11
44/44
TERMS TO LEARN PAGE NUMBER REFERENCE
"nsourcing age 36'
%a&eorbu decisions age 36'
Onetimeonl special order age 3'D
Outsourcing age 36'roductmix decisions age 33
;ualitative #actors age 3'D
;uantitative #actors age 3'=
!elevant costs age 3'4
!elevant revenues age 3'4