Cost management accounting and control 6e by hansen mowen guan chapter 18

COST MANAGEMENTAccounting & Control Hansen▪Mowen▪Guan Chapter 18 Activity Resource Usage Model and Tactical Decision... Step 3: Identify Predicted Costs and Benefits; Eliminate Irrelevan

COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan

Chapter 18 Activity Resource Usage Model and Tactical Decision

3 Explain how the activity resource usage

model is used in assessing relevancy.

4 Apply the tactical decision-making

concepts in a variety of business

situations.

Tactical Decision Making

Steps of the tactical decision making process

1 Recognize and define the problem.

2 Identify alternatives as possible solutions to the

problem, and eliminate alternatives that are not feasible.

3 Identify the predicted costs and benefits

associated with each feasible alternative

Eliminate the costs and benefits that are not

Tactical Decision Making

4 Compare the relevant costs and benefits for

each alternative, and then relate each

alternative to the overall strategic goals of the firm and other important qualitative factors.

5 Select the alternative with the greatest benefit

which also supports the organization’s strategic objectives.

Continued from previous slide

Each year 25 percent of the harvest by an apple

processor is small and odd-shaped.

These apples cannot be sold in the normal

distribution channels and have simply been

dumped in the orchards for fertilizer.

What should the firm do with these apples?

Step 1: Define the

Problem

Tactical Decision Making

Step 2: Identify Feasible

Alternatives

Tactical Decision Making

• Sell the apples to pig farmers.

– Eliminate: not enough local farmers

• Bag the apples in five-pound bags and sell them to local

– Eliminate: major capital investment required

• Continue with the current dumping practice.

– Eliminate: status quo

Step 3: Identify Predicted Costs and

Benefits; Eliminate Irrelevant Costs

Tactical Decision Making

Bagging Alternative

5 lbs of apples per bag

Cost: $0.05 per pound for labor

and materials (bags and ties)

Revenue: $1.30 per bag

Revenue: $0.78 per can

Step 4: Compare Relevant Costs and

Relate to Strategic Goals

Tactical Decision Making

Net benefit per lb

$0.25 Forward

integration strategy

Product differentiation strategy

Step 5: Select Best

Alternative

Tactical Decision Making

• The apple producer is reluctant to follow a forward integration strategy

• The bagging alternative should be chosen

Tactical Decision Making

continued

Tactical Decision Making

Continued from previous slide

Tactical Decision Making

Continued from previous slide

Relevant Costs and Revenues

• Relevant costs

– future costs that differ across alternatives

• Irrelevant Costs

– Past costs: already incurred “ sunk costs ”

are the same across alternatives; ignore

Relevancy, Cost Behavior, and the Activity Resource Usage Model

• Flexible Resources

– Easily purchased in the amount needed

– Purchased at the time of use

• Committed resources

– Purchased before they are used

Relevancy, Cost Behavior, and the Activity Resource Usage Model

• Flexible resources

– The activity resources demanded equal the resources supplied

Demand decrease

Relevancy, Cost Behavior, and the Activity Resource Usage Model

A company has five manufacturing engineers who supply a capacity of 10,000 engineering hours (2,000 hours each).

The cost of this activity capacity is $250,000,

or $25 per hour The firm expects to use

9,000 hours.

If the firm decides to reject a special order

requiring 500 hours, the cost of engineering

Relevancy, Cost Behavior, and the Activity Resource Usage Model

The firm can purchase a component that will

drop the demand from engineering hours

from 9,000 to 7,000.

Since engineering activity capacity is

acquired in chunks of 2,000, the company

can lay off one engineer or reassign the

engineer to another plant.

Relevancy, Cost Behavior, and the Activity Resource Usage Model

Illustrative Examples of Tactical Decision Making

Assumptions of C-V-P Analysis

1 The analysis assumes a linear revenue function and a

linear cost function.

2 The analysis assumes that price, total fixed costs, and

unit variable costs can be accurately identified and

remain constant over the relevant range.

3 The analysis assumes that what is produced is sold.

4 For multiple-product analysis, the sales mix is assumed

to be known.

5 The selling price and costs are assumed to be known

with certainty.

Illustrative Examples of Tactical Decision Making

• Common Decisions

– Make or Buy

– Keep or Drop

– Special Order

– Sell or Process Further

• Cost analysis informed by

– Activity-based cost management system

Talmage Company produces a mechanical part used in one of

its engines (Talmage produces engines for snowblowers.) An

outside supplier has offered to sell a part (Part 34B) for $4.75

The company normally produces 100,000 units of the part each

year

Make-or-Buy Decision

Illustrative Examples of Tactical Decision Making

Illustrative Examples of Tactical Decision Making

Make-or-Buy Decision

Illustrative Examples of Tactical Decision Making

Make-or-Buy Decision

Functional: make the part

Illustrative Examples of Tactical Decision Making

Keep-or-Drop Decision

If a segment is dropped only the traceable revenues and costs should vanish

ABC classifications

Dropping the product saves $45,000!

Illustrative Examples of Tactical Decision Making

Keep-or-Drop Decision

Accept or reject a special order

Illustrative Examples of Tactical Decision Making

Polarcreme, Inc., an ice-cream company, is operating at 80

percent of its 20 million half-gallon capacity

A distributor from another geographic region offered to buy 2

million units of premium ice cream at $1.75 per unit

Distributor will provide their own label and pay transportation

costs This sale is not subject to a sales commission

Impact of special order on non-unit level activities:

Special order unit revenue $1.75

Unit-level variable costs:

Accept or reject a special order

Illustrative Examples of Tactical Decision Making

Joint products have common

processes and costs of

production up to a split-off

point.

Sell or Process Further

Illustrative Examples of Tactical Decision Making

Joint products withcommon processesand common costs

Decision: Sell “Grade A” tomatoes as produce or process into

hot sauce 1 lb tomatoes yields 1 bottle of hot sauce

Differential Amount

Process further

COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan

End Chapter 19