Bài giảng Fundamentals of cost accounting - Chapter 4: Fundamentals of Cost Analysis for Decision Making

© 2014 by McGraw-Hill Education.  This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.  This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.  Fundamentals of Cost Analysis for Decision MakingChapter 4Learning ObjectivesLO 4-1 Use differential analysis to analyze decisions.LO 4-2 Understand how to apply differential analysis to pricing decisions.LO 4-3 Understand several approaches for establishing prices based on costs for long-run pricing decisions.LO 4-4 Understand how to apply differential analysis to production decisions.LO 4-5 Understand the theory of constraints.Differential AnalysisLO 4-1 Use differential analysis to analyze decisions.Differential AnalysisThe process of estimating revenues and costsof alternative actions available to decision makersand of comparing these estimates to the status quoShort RunThe period of time over which capacity will beunchanged, usually one yearLO 4-1Differential CostsWith two or more alternatives, costs that differamong or between alternativesCosts that change in response to an alternativecourse of actionDifferential costs differ between actions.Alternative AAlternative BLO 4-1Sunk CostsCosts incurred in the past that cannot bechanged by present or future decisionsA sunk cost is NOT relevant for making decisions.LO 4-1Differential Costs versus Total CostsSales revenueVariable costsContribution marginFixed costsOperating profit$750 (250)$500 (350)$150$900 (300)$600 (350)$250$150 (50)$100 -0- $100Status QuoDifferenceAlternativeInformation presented to management can show the detailed costs that are included for making a decision, or it can show just the differences between alternatives, as follows.LO 4-1Differential Analysis and Pricing DecisionsLO 4-2 Understand how to apply differential analysis to pricing decisions.Variable costs mustalways be covered.Fixed costs must becovered in the long run.LO 4-2Short-Run versus Long-RunPricing DecisionsShort-runpricing decision:Less than one yearPricing a one-timespecial order.Long-runpricing decision:Longer than one yearPricing a new product.Year 0Year 1LO 4-2Short-Run Pricing Decisions:Special OrdersAn order that will not affect other sales and is usually a one-time occurrenceLO 4-2 U-Develop has received a one-time offer for 500 prints at a special price of 40¢ per print ($200). The regular price is 50¢ and they have enough idle capacity in the week to take the offer.Sales for the week (5,000 prints at 50¢) $2,500Variable costs, including paper, maintenance, and usage payment to machine owner (5,000 copies at 20¢) 1,000Total contribution margin $1,500Fixed costs (supplies, plus allocated costs of the print shop) 1,200Operating profit for the week $ 300LO 4-2Short-Run Pricing Decisions:Special OrdersComparison of TotalsSales revenueVariable costsTotal contributionFixed costsOperating profitAlternative Presentation: Differential AnalysisDifferential sales, 500 at 40¢Less: Differential costs, 500 at 20¢Differential operating profit (before taxes)$2,500 (1,000)$1,500 (1,200)$ 300$2,700 (1,100)$1,600 (1,200)$ 400$ 200 100$ 100$200 (100)$100 -0- $100StatusQuo:RejectSpecialOfferAlternative:AcceptSpecialOfferDifferenceAnalysis of Special Order: U-DevelopLO 4-2Short-Run Pricing Decisions:Special OrdersLong-Run Pricing DecisionsLO 4-3 Understand several approaches for establishing prices based on costs for long-run pricing decisions.Full cost is the total cost to produce and sell a unit.Full costs are relevant for the long-term pricing decisions.LO 4-3Long-Run versus Short-Run PricingIn the short run, differential costs may be very low.In the long run, differential costs are higher than in the short run.LO 4-3Cost Analysis for PricingIn the long run an organization must cover all variable and fixed costs – both manufacturing and selling.LO 4-3Life-Cycle Product Costing and PricingProduct life-cycle is concerned with covering costs in all categories of the life cycle.R & DDesignManufacturingMarketing anddistributionCustomerserviceTake back(disposal)LO 4-3Target Costing from Target PricingTarget PriceThe price based on customers’ perceived value for the product and the price that competitors charge What would a customer pay? How much profit do I need? Can I make it at this cost?Target price – Desired profit = Target costLO 4-3Legal Issues Relating to Costs and Sales PricePredatory Pricing Practice of setting price below cost with the intent to drive competitors out of businessDumpingExporting a product to another country at a price below domestic costPrice DiscriminationPractice of selling identical goods to different customers at different pricesLO 4-3Peak-load PricingPractice of setting prices highest when the quantity demanded for the product approaches capacity.Price FixingAgreement among businesses to set prices at a particular level.LO 4-3Legal Issues Relating to Costs and Sales PriceUse of Differential Analysisfor Production DecisionLO 4-4 Understand how to apply differential analysis to production decisions.Make or buyDecision to make goods or services internally or purchase them externallyAdd or dropa segmentDecision to add or drop a productline or close a business unitProductchoiceDecision on what products or services to offer (product mix)LO 4-4Make-or-Buy DecisionsU-Develop’s current costs of developing prints:Costs directly traceable:Direct materialsDirect laborVariable manufacturing overheadFixed manufacturing overheadCommon costs allocated to this product lineTotal costs$0.05 0.12 .03$ 5,000 12,000 3,000 4,000 10,000$34,000Per unit100,000printsThis year’s expected volume is 100,000 prints, so the full cost of processing a print is:$34,000 ÷ 100,000 = $0.34LO 4-4Make-or-Buy DecisionsU-Develop received an offer from an outside developer to process any number of prints for 25¢ each. Should U-Develop accept this offer? The accounting department prepared cost analyses at volume levels of 50,000 and 100,000 prints per year.LO 4-4Make-or-Buy DecisionsDirect costs:Direct materialsLaborVariable overheadFixed overheadCommon costsTotal costs$ 5,000 12,000 3,000 4,000 10,000b$34,000$25,000a -0- -0- -0- 10,000b$35,000Processprints100,000prints$20,000 higher 12,000 lower 3,000 lower 4,000 lower -0- $ 1,000 higherOutsourceprocessingDifferencea 100,000 units purchased at $0.25 = $25,000b These common costs remain unchanged for these volumes. Because they do not change, they could be omitted from the analysis.Differential costs increase by $1,000, so reject alternative to buy. LO 4-4Make-or-Buy DecisionsDirect costs:Direct materialsLaborVariable overheadFixed overheadCommon costsTotal costs$ 2,500 6,000 1,500 4,000 10,000b$24,000$12,500a -0- -0- -0- 10,000b$22,500Processprints50,000prints$10,000 higher 6,000 lower 1,500 lower 4,000 lower -0- $ 1,500 lowerOutsourceprocessingDifferencea 50,000 units purchased at $0.25 = $12,500b These common costs remain unchanged for these volumes. Because they do not change, they could be omitted from the analysis.Differential costs decrease by $1,500, so accept alternative to buy. LO 4-4Opportunity Costs of MakingAssume that the facilities used to process prints could be used to offer a new service that would provide a $2,000 incremental contribution.Should U-Develop accept or reject the alternative? U-Develop’s expected volume is 100,000 prints.LO 4-4Opportunity Costs of MakingTotal cost of 100,000 printsOpportunity cost of usingfacilities to process printsTotal costs, including opportunity costs$34,000 2,000$36,000$35,000 -0- $35,000Status quo:Processprints$1,000 highera 2,000 lowera$1,000 loweraAlternative:OutsourceprocessingDifferencea These indicate whether the alternative is higher or lower than the status quo.Differential costs decrease by $1,000, so accept the alternative.LO 4-4Add or Drop DecisionsSales revenueCost of sales (all variable)Contribution marginLess fixed costs: Rent Salaries Marketing and administrativeOperating profit (loss)$80,000 53,000$27,000 4,000 5,000 3,000$15,000$10,000 8,000$ 2,000 1,000 1,000 500$ (500)$50,000 30,000$20,000 2,000 2,500 1,500$14,000Total$20,000 15,000$ 5,000 1,000 1,500 1,000$ 1,500PrintsCamerasFramesU-DevelopFourth Quarter Product Line Income StatementLO 4-4Add or Drop DecisionsSales revenueCost of sales (all variable)Contribution marginLess fixed costs: Rent Salaries Marketing and administrativeOperating profit (loss)$80,000 53,000$27,000 4,000 5,000 3,000$15,000$70,000 45,000$25,000 4,000 4,000 2,750$14,250$10,000 decrease 8,000 decrease$ 2,000 decrease -0- 1,000 decrease 250 decrease$ 750 decreaseStatus quo:Keep printsAlternative:Drop printsDifferenceU-DevelopDifferential AnalysisProfits decrease $750, so keep prints.LO 4-4Product Choice DecisionsConstraintsActivities, resources, or policies that limit the attainment of an objective.Contribution Margin per Unit of Scarce ResourceContribution margin per unit of a particular input with limited availability.LO 4-4Product Choice DecisionsU-DevelopRevenue and Cost Information$50 8 8 4$30PriceLess: Variable costs per unit Material Labor OverheadContribution margin per unitFixed costs Manufacturing Marketing and administrativeTotal$80 22 24 4$30Metalframes$3,000 1,500$4,500WoodframesLO 4-4Product Choice DecisionsU-DevelopRevenue and Cost Information$ 30÷ 0.5$ 60Per unit:Contribution marginMachine hours requiredContribution margin per machine hour$ 30÷ 1.0$ 30MetalframesWoodframesMetal Frames have a higher contribution margin per machine hour.LO 4-4Product Choice DecisionsSuppose U-Develop has 200 machine hours per month available. 400 × $30$12,000 3,000 1,500$ 7,500CapacityContribution margin per unitTotal contribution marginLess: Fixed manufacturing costsLess: Fixed marketing and admin. costsOperating profit 200 × $30$6,000 3,000 1,500$1,500MetalframesWoodframesSelling metal frames will result in higher profits than selling wooden frames.LO 4-4The Theory of ConstraintsLO 4-5 Understand the theory of constraints.Theory of ConstraintsFocuses on revenue and cost management when faced with bottlenecksBottleneckOperation where the work required limits production; Bottleneck is the constraining resourceThroughput ContributionSales dollars minus direct materials costs and variables such as energy and piecework laborLO 4-5End of Chapter 4