Managerial accounting and introduction to concepts methods and user 11e by maher chapter 07

SPECIAL ORDERSUllman has an opportunity for a one-time only special order to sell 100 units at $25 each.. Ullman has an opportunity for a one-time only special order to sell 100 units at

Differential Cost

Analysis for Operating Decisions

CHAPTER 7

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Managerial Accounting 11E

CHAPTER GOAL

This 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?

Ullman Educational Media (UEM) is a company that

produces tutorial videos for primary and preschool use

UEM developed the following estimates:

LO 1

Continued

Maximum production and sales capacity 1,200 units per month

U

E

M

ACTIVITY & COSTS

Ullman Educational Media provides the following

information about activities and costs:

CASH FLOW

Differential analysis focuses on cash flow

because

Cash is the medium of exchange in business

 Cash is a common objective measure of the costs

and benefits of alternatives

LO 1

Pricing Decisions

LO 2

Customer Demands

Competitors’

Actions

Cost of Products

Managers must consider competitors actions both nationally and internationally

Internal focus

on continuous improvements

is key to cutting costs

Internal focus

on continuous improvements

is key to cutting costs

SPECIAL ORDERS

Ullman 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?

Ullman 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?

adds $300 to the bottom line

Yes! Since

normal operations should be used to cover FC, not special orders, this special order

adds $300 to the bottom line

UE

M

Full cost, used for long

run decisions, is the total

cost of producing and selling a unit

Full cost, used for long

run decisions, is the total cost of producing and selling a unit

U

E

M

Although full cost + profit may be used initially,

short term adjustments may reflect market

conditions.

LO 2

PRODUCT LIFE CYCLE:

withdrawn

LO 2

Predatory pricing: Definition

Is when a business deliberately prices

below its costs to drive out competitors

LO 2

Dumping: Definition

Occurs when a foreign company sells a

product in the U.S at a price below the

market value in the country of its creation

Customer cost Activities

Cost to acquire customer Promote product; campaign to

win lost customers; run advertising campaign

Cost to provide goods and services Process order; deliver product;

process returns

Cost to maintain customers Bill customers; process

payments; issue refunds Cost to retain customers Follow-up calls

USING ACTIVITY-BASED COSTING: Analyze Profitability

LO 4

THEORY OF CONSTRAINTS

The 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:

1 Throughput contribution

2 Investments

3 Other operating costs

The 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:

1 Throughput contribution

2 Investments

3 Other operating costs

LO 6

BOTTLENECK: Definition

Is an operation in which the

work to be performed equals or

exceeds the available capacity

LO 6

MANAGING THE BOTTLENECK

Recognize that the bottleneck resource determines

throughput contribution of product

Search for, find bottleneck

Resource with large quantities of inventory waiting to be

worked on

 Subordinate all non-bottleneck resources to the

bottleneck resource

Increase bottleneck efficiency, capacity

 Repeat 4 steps for any new bottleneck

LO 6

The 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

The 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 7

JOINT PRODUCTS

In 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?

In some circumstances, multiple products

can be produced from a single

production process The question for

management is: What is the effect of

SPLITOFF POINT: Definition

Is the point up to which all costs are joint and after which additional processing costs are identified with other products

LO 8

ADD OR DROP

Managers 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.

Managers 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 9

MANAGERS WANT TO KNOW!

Click the button to skip Example

INVENTORY MANAGEMENT

Inventory has a direct affect on profit and

must be carefully managed Key questions for managers are:

1 How many units should be on hand for use

or sale?

2 How often should the firm order an item

and what is the optimal order size?

Inventory has a direct affect on profit and

must be carefully managed Key

questions for managers are:

1 How many units should be on hand for use

or sale?

2 How often should the firm order an item

and what is the optimal order size?

LO 10

MANAGERS WANT TO KNOW!

JUST-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

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 10

LINEAR PROGRAMMING

Linear 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

product mix that will maximize profits

given the constraints, (b) provides

opportunity costs of constraints, and (c)

allows for sensitivity analysis

LO 11

ECONOMIC 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.”

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 12

End of CHAPTER 7