© 2002 pearson education canada inc. slide 9-1 relevant information and decision making: production...
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© 2002 Pearson Education Canada Inc. Slide 9-1
Relevant Informationand Decision Making:Production Decisions
9
© 2002 Pearson Education Canada Inc. Slide 9-2
Opportunity Costs
Opportunity Cost• The maximum available contribution to profit
foregone by using limited resources for a particular purpose
• Not a cost in the normal sense of the word
• Consider the choice between staying with your current job or returning to school; if you quit your job to return to school the wages which you would have earned had you stayed in the job are an opportunity cost of returning to school
© 2002 Pearson Education Canada Inc. Slide 9-3
Differential Costs
Differential Analysis• Differences in revenues and costs between two
alternatives
• Also called incremental analysis
Remain Open AnAs An Independent
Employee Practice Difference
Revenues $60,000 $200,000 $140,000Outlay costs 0 120,000 120,000
Income effect per year $60,000 $80,000 $ 20,000
© 2002 Pearson Education Canada Inc. Slide 9-4
Make or Buy Decision
• decision to manufacture the product or subcontract to an independent supplier (outsource)
Make Buy
Relevant costs:
Direct material $20,000
Direct labour 80,000
Variable overhead 40,000
Fixed overhead 20,000
Cost to buy $200,000
Total cost $160,000 $200,000
© 2002 Pearson Education Canada Inc. Slide 9-5
Make, Buy, Rent?
• If the company buys the parts, the facility will be idle. Other options include renting out the facilities ($35k) or manufacturing another product generating revenue ($55)
• Identify the best scenario
© 2002 Pearson Education Canada Inc. Slide 9-6
Make, Buy, Rent??
Make Buy/Idle Buy/RentBuy/Other Product
Rent RevenueRevenue from other ProductsCost of obtaining parts Net relevant costs
© 2002 Pearson Education Canada Inc. Slide 9-7
Joint and Separable Costs in Joint Production Processes
Split-Off Point• Point in manufacturing process where products separate
Joint Product Cost• A cost incurred in a production process prior to the split-off point
which cannot be identified with specific intermediate or final products except in an arbitrary manner
Separable Cost• A cost which related to a specific product (cost objective)
ChemicalX
$90,000
SeparableProcessing Cost
$40,000
ChemicalY
$30,000
ChemicalYA
$80,000
JointCost
$100,000
Split-OffPoint
© 2002 Pearson Education Canada Inc. Slide 9-8
Sell or Process Further Decision
• decision, in a joint production process, to sell product at the split-off point or process further
Sell @ Split Process Further
Relevant revenue: $30,000 $80,000
Relevant costs:
Cost to processbeyond split-off point 40,000
Total cost $30,000 $40,000
© 2002 Pearson Education Canada Inc. Slide 9-9
Group: In Class
• Problem 3• Problem 5
© 2002 Pearson Education Canada Inc. Slide 9-10
Assignment
• Problem 11, 13, 15
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