Kế toán, kiểm toán - Chapter 7: Differential cost analysis for operating decisions

1Differential Cost Analysis for Operating DecisionsCHAPTER 7© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. PowerPoint Presentation by LuAnn BeanProfessor of AccountingFlorida Institute of TechnologyManagerial Accounting 11E Maher/Stickney/Weil2CHAPTER GOALThis chapter explains how managers can use differential analysis to examine the effects on profits. Differential analysis helps managers answer relevant questions such as:What activities differ between the alternatives?How does that difference affect costs and profits?☼☼3DIFFERENTIAL ANALYSIS: DefinitionIs the analysis of differences among particular alternative actions.LO 14EXAMPLE: Ullman Educational MediaUllman Educational Media (UEM) is a company that produces tutorial videos for primary and preschool use. UEM developed the following estimates:LO 1ContinuedUnits made and sold800 per monthMaximum production and sales capacity1,200 units per monthSelling price$ 30UEM5ACTIVITY & COSTSUllman Educational Media provides the following information about activities and costs:LO 1ContinuedVC per unitFC per monthManufacturing $ 17$ 3,060Marketing and Administrative51,740Total costs$ 22$4,800UEM6LO 1EXHIBIT 7.2UEMProfit decreases by $1,000. 7CASH FLOWDifferential analysis focuses on cash flow because Cash is the medium of exchange in businessCash is a common objective measure of the costs and benefits of alternativesLO 18Pricing DecisionsLO 2CustomerDemandsCompetitors’ ActionsCost of ProductsWill raising prices lose customers to a competitor or cause them to substitute cheaper goods? MANAGERS WANT TO KNOW!Managers must consider competitors actions both nationally and internationally. Internal focus on continuous improvements is key to cutting costs. 9SPECIAL ORDERSUllman has an opportunity for a one-time only special order to sell 100 units at $25 each. The regular price is $28. Should they accept the special order?LO 2MANAGERS WANT TO KNOW!UEMContinued10LO 2EXHIBIT 7.3Yes! Since normal operations should be used to cover FC, not special orders, this special order adds $300 to the bottom line. UEM11LO 2EXHIBIT 7.5Full cost, used for long run decisions, is the total cost of producing and selling a unit. UEM12PRICING DECISIONSUse of full cost in pricing decisions is justified because In the long run, prices must cover all costs to surviveLong term contractual agreements must cover all costsPrices in regulated industries are often based on full costAlthough full cost + profit may be used initially, short term adjustments may reflect market conditions.LO 213PRODUCT LIFE CYCLE: DefinitionCovers the time from initial research and development to time support to customer is withdrawn.LO 214Predatory pricing: DefinitionIs when a business deliberately prices below its costs to drive out competitors.LO 2Dumping: DefinitionOccurs when a foreign company sells a product in the U.S. at a price below the market value in the country of its creation.15What is target cost?Target cost is the target price less the target profit.LO 316LO 3EXHIBIT 7.5Value engineering is a systematic evaluation of all aspects of the business.17Customer costActivitiesCost to acquire customerPromote product; campaign to win lost customers; run advertising campaignCost to provide goods and servicesProcess order; deliver product; process returnsCost to maintain customersBill customers; process payments; issue refundsCost to retain customersFollow-up callsUSING ACTIVITY-BASED COSTING: Analyze ProfitabilityLO 418THEORY OF CONSTRAINTSThe theory of constraints (TOC) acknowledges that businesses often have constraints or limits on what can be done. TOC encourages managers to identify where constraints arise and to develop methods to manage them. Three factors predominate:Throughput contributionInvestmentsOther operating costsLO 619BOTTLENECK: DefinitionIs an operation in which the work to be performed equals or exceeds the available capacity. LO 620MANAGING THE BOTTLENECKRecognize that the bottleneck resource determines throughput contribution of product Search for, find bottleneckResource with large quantities of inventory waiting to be worked onSubordinate all non-bottleneck resources to the bottleneck resourceIncrease bottleneck efficiency, capacityRepeat 4 steps for any new bottleneckLO 621MAKE-OR-BUYThe make-or-buy decision is one where the firm must decide whether to meet its needs internally or to acquire goods or services externally. Both cost and non-quantitative factors are considered.LO 722JOINT PRODUCTSIn some circumstances, multiple products can be produced from a single production process. The question for management is: What is the effect of additional processing/production on profits?LO 8MANAGERS WANT TO KNOW!23SPLITOFF POINT: DefinitionIs the point up to which all costs are joint and after which additional processing costs are identified with other products.LO 824ADD OR DROPManagers must decide when to add or drop products; when to open or abandon sales territories. The differential principle involved can be stated:If differential revenue from selling exceeds differential costs of product, the product is profitable and the firm should continue production.LO 9MANAGERS WANT TO KNOW!Click the button to skip Example25INVENTORY MANAGEMENTInventory has a direct affect on profit and must be carefully managed. Key questions for managers are:How many units should be on hand for use or sale?How often should the firm order an item and what is the optimal order size?LO 10MANAGERS WANT TO KNOW!26JUST-IN-TIME (JIT)JIT is a philosophy, not a tool, that dovetails with total quality management (TQM) in that TQM requires reliable processing systems and disallows defective units. Flexible manufacturing that reduces both setup and inventory levels also enhances JIT.LO 1027LINEAR PROGRAMMINGLinear programming: (a) finds the product mix that will maximize profits given the constraints, (b) provides opportunity costs of constraints, and (c) allows for sensitivity analysis.LO 1128ECONOMIC ORDER QUANTITY (EOQ)The economic order quantity (EOQ) model is a mathematical model that gives the optimal amount of goods to order when demand reduces inventory to a level called the “reorder point.”LO 1229End of CHAPTER 7