Kế toán, kiểm toán - Chapter 7: The use of cost information in management decision making

Prepared by Debby Bloom-Hill CMA, CFMSlide 7-2CHAPTER 7 The Use of Cost Information in Management Decision MakingSlide 7-3Incremental AnalysisIncremental analysisAll decisions involve a choice among alternative courses of actionThe solution to business problems involves incremental analysisIncremental analysis is the analysis of the incremental revenue and incremental costs incurred when one alternative is chosen over anotherLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-4Incremental AnalysisIncremental RevenueAdditional revenue received by selecting one alternative over anotherIncremental CostAdditional cost incurred by selecting one alternative over anotherIncremental ProfitDifference between incremental revenue and incremental costLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-5Incremental AnalysisAn alternative that yields an incremental profit should be selectedIncremental costs are referred to as relevant costs Also called differential costs because they are the costs that differ between decision alternativesLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-6Incremental Analysis ExampleJensen’s Rapid Copy is considering extending its hoursAlternative 1 is the status quoAlternative 2 involved the company extending their hours from 8 pm to midnightThe next slide shows the incremental costs and revenues associated with choosing one alternative over anotherLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-7Incremental Analysis ExampleLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-8Incremental AnalysisIncremental Analysis can be extended to more than two alternativesCalculate profit for each alternativeThe alternative with the highest profit is the best alternativeDifference between the profit for this alternative and the profit of any other alternative is the incremental profitLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-9“What Does This Product Cost?”Answer: Why do you want to know?No single cost number is relevant for all decisionsMust find incremental information that is applicable to the decisionSome costs will change due to the decision, some will notOnly costs that change are relevantLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Which of the following is likely to be an incremental cost associated with increasing planned production run of 1,000 units to 1,010 units?Set-up costsDepreciation of equipmentInspection costsMaterial costsAnswer: dMaterial costs are variable costs and usually incrementalTest Your Knowledge 1Slide 7-10Learning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-11Analysis of Decisions Faced by Managers Three decisions that managers frequently face:The decision to engage in additional processing of a productThe decision to make or buy a productThe decision to drop a product lineLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-12Additional Processing DecisionManufacturers must occasionally decide whether to:Sell a product in a partially completed stage, orIncur additional processing costs required to complete the productCosts incurred to date of decision on partially complete product are not relevant, i.e sunk costs.Learning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-13Additional Processing Decision – Bridge Computer ExampleSummary of cost informationLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-14Additional Processing Decision – Bridge Computer ExampleIncremental analysis summaryIncremental revenues are $500Incremental costs are $400Would you spend $400 to generate an additional $500? Answer: Yes, incremental profit is $100Slide 7-15Additional Processing Decision – Bridge Computer ExampleIncremental analysis summaryLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-16Additional Processing DecisionSlide 7-17Make or Buy DecisionsMost manufactured goods are made up of numerous componentsIn some cases, a company may purchase one or more of these components from another company or manufacture them themselvesThe analysis of this decision concentrates solely on incremental costsLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-18Make-or-Buy Decisions – General Refrigeration ExampleAdditional information:If purchased, cost savings include $390,000 in supervisory salaries and all variable costs.Market value of production machinery is zeroSlide 7-19A key issue is to determine which of the above costs are incrementalNone of the $15 million of variable manufacturing costs will be incurred if the part is purchasedThe fixed costs associated with depreciation will not be savedNote that not all fixed costs are irrelevant sunk costsMake-or-Buy Decisions – General Refrigeration ExampleLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-20Some fixed costs are avoidable costsAvoidable costs can be avoided if a particular action is undertakenIf the parts are purchased from an outside vendor, the salaries of 5 supervisors will be savedThe savings total $390,000 of avoidable fixed costsIt will cost the company an additional $110,000 to purchase the partMake-or-Buy Decisions – General Refrigeration ExampleLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-21Make-or-Buy Decisions – General Refrigeration ExampleIncremental cost analysis – 3 column formatLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-22Make-or-Buy Decisions – General Refrigeration ExampleIncremental cost analysis - single column formatLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Which of the following is not likely to be an incremental cost for a make-or-buy decision?Materials costDirect labor costVariable manufacturing costDepreciation of buildingAnswer: dDepreciation of building is not likely to change no matter which alternative is chosen in a make-or-buy decisionTest Your Knowledge 2Slide 7-23Learning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-24An opportunity cost is the value of benefits foregone by selecting one decision alternative over anotherFor example, if you spend $1,000 instead of investing in a certificate of deposit, the interest that could have been earned is an opportunity costSince opportunity costs differ depending on the option selected, they are incremental costsOpportunity CostsLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Which of the following is true?Opportunity costs are never incremental costsOpportunity costs are always incremental costsAnswer: bOpportunity costs are always incremental costs because they differ depending upon the outcome selectedTest Your Knowledge 3Slide 7-25Learning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-26Suppose the Tennessee plant is currently spending $500,000 per year to rent space for manufacturing shelving used in the refrigeration unitsIf production of compressors is discontinued, the company will not need to rent the spaceIn the incremental analysis on the next slide, the rent savings is shown along with the other cost savingsOpportunity Costs – General Refrigeration ExampleLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-27Make-or-Buy Decisions – General Refrigeration ExampleIncremental analysis with opportunity costsLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-28Dropping a Product LineAnalysis involves calculating the change in income that will result from dropping the product lineIf income increases, the product line should be droppedIf income decreases, the product line should not be droppedThis amounts to comparing the incremental revenues and costs that result from dropping the product lineLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-29Dropping a Product Line – Mercer HardwareMercer Hardware sells 3 product lines, tools, hardware and gardenDirect fixed costs are directly traceable to each product lineAllocated fixed costs are not directly traceable to a product lineAllocated fixed costs are generally not avoidable, thus no common fixed costs will be saved if the product line is droppedLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-30Dropping a Product Line – Mercer Hardware ExampleProfit calculation with three product linesLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-31Dropping a Product Line – Mercer Hardware ExampleProfit calculation with two product linesSlide 7-32Dropping a Product Line – Mercer Hardware ExampleLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-33Beware of the Cost Allocation Death SpiralWhen dropping a product lineCommon fixed costs are not incrementalCommon fixed cost allocation is spread among remaining product linesManagement must understand and remember this impact when making decisionsLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-34Summary of Incremental, Avoidable, Sunk and Opportunity CostsBasic approach is to compare decision alternatives in terms of costs and revenues that are incrementalAvoidable costsCosts that can be avoided by taking a particular course of actionAlways incremental costs, and therefore relevant to a decisionLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-35Summary of Incremental, Avoidable, Sunk and Opportunity CostsBasic approach is to compare decision alternatives in terms of costs and revenues that are incrementalSunk costsAlready occurred and not reversibleAre not incremental because they do not differ among alternativesAre not relevant in decision makingLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-36Summary of Incremental, Avoidable, Sunk and Opportunity CostsBasic approach is to compare decision alternatives in terms of costs and revenues that are incrementalMany students assume that fixed costs are equivalent to sunk costsThis is not always the caseFixed costs can be sunk, not sunk and irrelevant, or possibly relevantLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-37Summary of Incremental, Avoidable, Sunk and Opportunity CostsBasic approach is to compare decision alternatives in terms of costs and revenues that are incrementalOpportunity costsRepresent the benefit foregone by selecting a particular alternativeThey are always incremental and relevant to a decisionLearning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-38Which of the following costs should not be taken into consideration when making a decision?Opportunity costsSunk costsRelevant costsDifferential costsAnswer: bSunk costsTest Your Knowledge 4Learning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Slide 7-39Classify each of the following as sunk and irrelevant, not sunk but still irrelevant, or not sunk and relevant Depreciation on equipment already purchased Sunk and irrelevant (not incremental)President’s salary, which will not change for both action A and action B Not sunk and irrelevant (not incremental)Salary of supervisory who will be retained for action A and fired for action B Not sunk and relevant (incremental)Test Your Knowledge 5Learning objective 1: Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions, and define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.Learning objective 2: Analyze decisions involving joint costs, and discuss the importance of qualitative considerations in management decisions.Slide 7-40Decisions Involving Joint CostsJoint Products When two or more products always result from common inputsJoint CostsCosts of the common inputsSplit-Off PointStage of production in which individual products are identifiedProduct may undergo further processing and may incur additional costsSlide 7-41Allocation of Joint CostsFor financial reporting, the cost of common inputs must be allocated to the joint productsThe total joint cost will be incurred no matter what the company does with the joint products beyond the split-off pointThe joint cost is not incremental to production of an individual joint product and irrelevant to decisions regarding an individual joint productLearning objective 2: Analyze decisions involving joint costs, and discuss the importance of qualitative considerations in management decisions.Slide 7-42Joint Products ExampleLearning objective 2: Analyze decisions involving joint costs, and discuss the importance of qualitative considerations in management decisions.Slide 7-43 Joint Cost Allocation Methods Slide 7-44 Joint Cost Allocation ExampleSlide 7-45 Joint Cost Allocation Methods Slide 7-46 Joint Cost Allocation ExampleSlide 7-47Additional Processing Decisions and Joint CostsJoint costs not relevant to decisions made after the split-off point because they are not incrementalJoint costs incurred prior to the split-off point are sunk costs and have no effect on what happens after the split-off pointLearning objective 2: Analyze decisions involving joint costs, and discuss the importance of qualitative considerations in management decisions.Slide 7-48The joint costs incurred in a joint product situation:Are incurred before the split-off pointAre incurred after the split-off pointShould only be allocated based on physical attributesShould never be allocatedAnswer: aAre incurred before the split-off pointTest Your Knowledge 6Learning objective 2: Analyze decisions involving joint costs, and discuss the importance of qualitative considerations in management decisions.Slide 7-49Qualitative Considerations in Decision AnalysisMany decisions have one or more features that are difficult to quantify but should be given careful considerationExamples include, but are not limited toSwings in the economyLoss of controlQuality of the productQuality of serviceCompany moraleSlide 7-50Qualitative Considerations in Decision AnalysisSlide 7-51Qualitative FactorsLearning objective 2: Analyze decisions involving joint costs, and discuss the importance of qualitative considerations in management decisions.Learning objective A1: Understand the five-step approach to the Theory of Constraints (TOC).Slide 7-52Appendix – The Theory of ConstraintsThe Theory of Constraints is an approach to production and constraint management developed by Eli GoldrattFive step processLarge increases in profit can be achieved by elimination of bottlenecks in production processesLearning objective A1: Understand the five-step approach to the Theory of Constraints (TOC).Slide 7-53Appendix – The Theory of ConstraintsGoldratt specified a five step process for dealing with constraintsIdentify the Binding ConstraintThe binding constraint is the process that limits throughputOptimize Use of the ConstraintProduce products with the highest contribution margin per unit of the constraintLearning objective A1: Understand the five-step approach to the Theory of Constraints (TOC).Slide 7-54Appendix – The Theory of ConstraintsGoldratt specified a five step process for dealing with constraintsSubordinate Everything Else to the ConstraintManagers should focus their attention on trying to loosen the constraint and not on process improvementsLearning objective A1: Understand the five-step approach to the Theory of Constraints (TOC).Slide 7-55Appendix – The Theory of ConstraintsGoldratt specified a five step process for dealing with constraintsBreak the ConstraintThis can be done many ways including cross training workers, outsourcing, purchasing additional equipment or hiring new workersIdentify a New Binding ConstraintIdentify the additional bottlenecks. If there are no bottlenecks and excess capacity, focus on building demandLearning objective A1: Understand the five-step approach to the Theory of Constraints (TOC).Slide 7-56Implications of The Theory of ConstraintsInspectionsShould take place before work is transferred to a constrained departmentBatch sizesWhen a production process is a binding constraint, it may be better to have large batch sizesThe time of the constrained department is not wasted setting up equipment for numerous batchesAcross the board cutsCuts in bottleneck departments may make sense, but across the board cuts can have a serious negative impact on profitsLearning objective A1: Understand the five-step approach to the Theory of Constraints (TOC).Slide 7-57You Get What You Measure and The Theory of ConstraintsSlide 7-58Copyright© 2016 John Wiley & Sons, Inc. All rights reserved. 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