管理會計學(xué)英文版課件：Chap14 Differential Analysis The Key to Decision Making

1、Differential Analysis: The Key to Decision MakingChapter 14Learning Objective 1Identify relevant and irrelevant costs and benefits in a decision.1Cost Concepts for Decision Making A relevant cost is a cost that differs between alternatives.122Identifying Relevant CostsAn avoidable cost is a cost tha

2、t can be eliminated, in whole or in part, by choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs.Two broad categories of costs are never relevant in any decision. They include: Sunk costs.Future costs that do not differ between the altern

3、atives.3Relevant Cost Analysis: A Two-Step ProcessEliminate costs and benefits that do not differ between alternatives.Use the remaining costs and benefits that differ between alternatives in making the decision. The costs that remain are the differential, or avoidable, costs.Step 1Step 24Different

4、Costs for Different PurposesCosts that are relevant in one decision situation may not be relevant in another context. Thus, in each decision situation, the manager must examine the data at hand and isolate the relevant costs. 5Identifying Relevant CostsCynthia, a Malaysian student studying in Penang

5、, is considering visiting her friend in Kuala Lumpur. She can drive or take the budget airline. By car, it is 230 miles to her friends apartment. She is trying to decide which alternative is less expensive and has gathered the following information:$45 per month 8 months$2.70 per gallon 27 MPG$24,00

6、0 cost $10,000 salvage value 5 years6Identifying Relevant Costs7Identifying Relevant CostsWhich costs and benefits are relevant in Cynthias decision?The cost of the car is a sunk cost and is not relevant to the current decision.However, the cost of gasoline is clearly relevant if she decides to driv

7、e. If she takes the plane, the cost would not be incurred, so it varies depending on the decision.The annual cost of insurance is not relevant. It will remain the same if she drives or takes the plane.8Identifying Relevant CostsWhich costs and benefits are relevant in Cynthias decision?The cost of m

8、aintenance and repairs is relevant. In the long-run these costs depend upon miles driven. The monthly school parking fee is not relevant because it must be paid if Cynthia drives or takes the plane.At this point, we can see that some of the average cost of $0.619 per mile are relevant and others are

9、 not.9Identifying Relevant CostsWhich costs and benefits are relevant in Cynthias decision?The decline in resale value due to additional miles is a relevant cost. The round-trip airfare is clearly relevant. If she drives the cost can be avoided. Relaxing on the plane is relevant even though it is di

10、fficult to assign a dollar value to the benefit. The kennel cost is not relevant because Cynthia will incur the cost if she drives or takes the plane.10Identifying Relevant CostsWhich costs and benefits are relevant in Cynthias decision?The cost of parking in Kuala Lumpur is relevant because it can

11、be avoided if she takes the plane. The benefits of having a car in Kuala Lumpur and the problems of finding a parking space are both relevant but are difficult to assign a dollar amount.11Identifying Relevant CostsFrom a financial standpoint, Cynthia would be better off taking the plane to visit her

12、 friend. Some of the non-financial factor may influence her final decision.12Total and Differential Cost ApproachesUsing the differential approach is desirable for two reasons:Only rarely will enough information be available to prepare detailed income statements for both alternatives.Mingling irrele

13、vant costs with relevant costs may cause confusion and distract attention away from the information that is really critical.13Total and Differential Cost ApproachesThe management of a company is considering a new labor saving machine that rents for $3,000 per year. Data about the companys annual sal

14、es and costs with and without the new machine are:14Total and Differential Cost ApproachesAs you can see, the only costs that differ between the alternatives are the direct labor costs savings and the increase in fixed rental costs.We can efficiently analyze the decision bylooking at the different c

15、osts and revenues and arrive at the same solution.15Learning Objective 2Prepare an analysis showing whether a product line or other business segment should be dropped or retained.16Adding/Dropping SegmentsOne of the most important decisions managers make is whether to add or drop a business segment.

16、 Ultimately, a decision to drop an old segment or add a new one is going to hinge primarily on the impact the decision will have on net operating income. To assess this impact, it is necessary to carefully analyze the costs.17Adding/Dropping SegmentsDue to the declining popularity of digital watches

17、, Lovell Companys digital watch line has not reported a profit for several years. Lovell is considering discontinuing this product line.18A Contribution Margin ApproachDECISION RULELovell should drop the digital watch segment only if its profit would increase. Lovell will compare the contribution ma

18、rgin that would be lost to the costs that would be avoided if the line was to be dropped. Lets look at this solution.19Adding/Dropping Segments20Adding/Dropping SegmentsAn investigation has revealed that the fixed general factory overhead and fixed general administrative expenses will not be affecte

19、d by dropping the digital watch line. The fixed general factory overhead and general administrative expenses assigned to this product would be reallocated to other product lines.21Adding/Dropping SegmentsThe equipment used to manufacturedigital watches has no resalevalue or alternative use.Should Lo

20、vell retain or dropthe digital watch segment?22A Contribution Margin ApproachRetain23Comparative Income ApproachThe Lovell solution can also be obtained by preparing comparative income statements showing results with and without the digital watch segment.Lets look at this second approach.24If the di

21、gital watch line is dropped, the company loses $300,000 in contribution margin. 25On the other hand, the general factory overhead would be the same under both alternatives, so it is irrelevant.26The salary of the product line manager would disappear, so it is relevant to the decision.27The depreciat

22、ion is a sunk cost. Also, remember that the equipment has no resale value or alternative use, so the equipment and the depreciation expense associated with it are irrelevant to the decision. 28The complete comparative income statements reveal that Lovell would earn $40,000 of additional profit by re

23、taining the digital watch line. 29Beware of Allocated Fixed CostsWhy should we keep the digital watch segment when its showing a $100,000 loss?30Beware of Allocated Fixed CostsThe answer lies in the way we allocate common fixed costs to our products.31Beware of Allocated Fixed CostsOur allocations c

24、an make a segment look less profitable than it really is.Including unavoidable common fixed costs makes the product line appear to be unprofitable.32Learning Objective 3Prepare a make or buy analysis.33The Make or Buy DecisionWhen a company is involved in more than one activity in the entire value c

25、hain, it is vertically integrated. A decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier is called a “make or buy” decision.34Vertical Integration- AdvantagesSmoother flow of parts and materialsBetter quality controlRealize profits

26、35Vertical Integration- DisadvantageCompanies may fail to take advantage of suppliers who can create economies of scale advantage by pooling demand from numerous companies. While the economics of scale factor can be appealing, a company must be careful to retain control over activities that are esse

27、ntial to maintaining its competitive position. 36The Make or Buy Decision: An ExampleEssex Company manufactures part 4A that is used in one of its products.The unit product cost of this part is:37The Make or Buy DecisionThe special equipment used to manufacture part 4A has no resale value.The total

28、amount of general factory overhead, which is allocated on the basis of direct labor hours, would be unaffected by this decision.The $30 unit product cost is based on 20,000 parts produced each year.An outside supplier has offered to provide the 20,000 parts at a cost of $25 per part. Should we accep

29、t the suppliers offer?38The Make or Buy DecisionThe avoidable costs associated with making part 4A include direct materials, direct labor, variable overhead, and the supervisors salary.39The Make or Buy DecisionThe depreciation of the special equipment represents a sunk cost. The equipment has no re

30、sale value, thus its cost and associated depreciation are irrelevant to the decision.40The Make or Buy DecisionNot avoidable; irrelevant. If the product is dropped, it will be reallocated to other products.41The Make or Buy DecisionShould we make or buy part 4A? Given that the total avoidable costs

31、are less than the cost of buying the part, Essex should continue to make the part.42Opportunity CostAn opportunity cost is the benefit that is foregone as a result of pursuing some course of action.Opportunity costs are not actual cash outlays and are not recorded in the formal accounts of an organi

32、zation.How would this concept potentially relate to the Essex Company?43Value to Business (Deprival Value)Recoverable Value (RV)= Higher of Replacement Cost (RC)Deprival value= Lower ofNet Realizable Value (NRV)Value in Use (VIU)Economic Value (EV) or Present Value (PV)44Opportunity Costs: An Exampl

33、eFed Co. Ltd. is considering the publication of a limited edition of a book, bound in a special grade of leather. The leather was bought some year ago for $500.The current price for the same quantity of leather would be $1,200Fed Co. Ltd. Can use the leather to cover desk furnishings, in replacement

34、 for other material which would cost $400Fed Co. Ltd. can sell it with a net disposal proceeds of $300How much should the leather be valued for the use of book bounding?45Opportunity Cost: Deprival Value ApproachRecoverable Value (RV)= Higher of Replacement Cost(RC)$1,200Deprival value= Lower ofNet

35、Realizable Value(NRV)$300Value in Use (VIU) (Economic Value (EV)$400$400$40046Learning Objective 4Prepare an analysis showing whether a special order should be accepted.47Key Terms and ConceptsA special order is a one-time order that is not considered part of the companys normal ongoing business.Whe

36、n analyzing a special order, only the incremental costs and benefits are relevant. Since the existing fixed manufacturing overhead costs would not be affected by the order, they are not relevant.48Special OrdersJet Corporation. makes a single product whose normal selling price is $20 per unit.A fore

37、ign distributor offers to purchase 3,000 units for $10 per unit. This is a one-time order that would not affect the companys regular business.Annual capacity is 10,000 units, but Jet Corporation is currently producing and selling only 5,000 units.Should Jet accept the offer?49Special Orders$8 variab

38、le cost50Special OrdersIf Jet accepts the special order, the incremental revenue will exceed the incremental costs. In other words, net operating income will increase by $6,000. This suggests that Jet should accept the order.Note: This answer assumes that the fixed costs are unavoidable and that var

39、iable marketing costs must be incurred on the special order.51Quick Check Northern Optical ordinarily sells the X-lens for $50. The variable production cost is $10, the fixed production cost is $18 per unit, and the variable selling cost is $1. A customer has requested a special order for 10,000 uni

40、ts of the X-lens to be imprinted with the customers logo. This special order would not involve any selling costs, but Northern Optical would have to purchase an imprinting machine for $50,000. (see the next page) 52Quick Check What is the rock bottom minimum price below which Northern Optical should

41、 not go in its negotiations with the customer? In other words, below what price would Northern Optical actually be losing money on the sale? There is ample idle capacity to fulfill the order and the imprinting machine has no further use after this order.a. $50b. $10c. $15d. $2953 What is the rock bo

42、ttom minimum price below which Northern Optical should not go in its negotiations with the customer? In other words, below what price would Northern Optical actually be losing money on the sale? There is ample idle capacity to fulfill the order and the imprinting machine has no further use after thi

43、s order.a. $50b. $10c. $15d. $29Quick Check Variable production cost $100,000Additional fixed cost + 50,000Total relevant cost$150,000Number of units 10,000Average cost per unit= $1554Learning Objective 5Determine the most profitable use of a constrained resource and the value of obtaining more of t

44、he constrained resource.55Key Terms and ConceptsWhen a limited resource of some type restricts the companys ability to satisfy demand, the company is said to have a constraint.The machine or process that is limiting overall output is called the bottleneck it is the constraint.56Utilization of a Cons

45、trained ResourceFixed costs are usually unaffected in these situations, so the product mix that maximizes the companys total contribution margin should ordinarily be selected.A company should not necessarily promote those products that have the highest unit contribution margins. Rather, total contri

46、bution margin will be maximized by promoting those products or accepting those orders that provide the highest contribution margin in relation to the constraining resource. 57Utilization of a Constrained Resource: An ExampleEnsign Company produces two products and selected data are shown below:58Uti

47、lization of a Constrained Resource: An ExampleMachine A1 is the constrained resource and is being used at 100% of its capacity. There is excess capacity on all other machines. Machine A1 has a capacity of 2,400 minutes per week.Should Ensign focus its efforts on Product 1 or Product 2?59Quick Check

48、How many units of each product can be processed through Machine A1 in one minute? Product 1 Product 2a. 1 unit 0.5 unitb. 1 unit 2.0 unitsc. 2 units 1.0 unitd. 2 units 0.5 unit60 How many units of each product can be processed through Machine A1 in one minute? Product 1 Product 2a. 1 unit 0.5 unitb.

49、 1 unit 2.0 unitsc. 2 units 1.0 unitd. 2 units 0.5 unitQuick Check Just checking to make sure you are with us.61Quick Check What generates more profit for the company, using one minute of machine A1 to process Product 1 or using one minute of machine A1 to process Product 2?a. Product 1b. Product 2c

50、. They both would generate the same profit.d. Cannot be determined.62Quick Check What generates more profit for the company, using one minute of machine A1 to process Product 1 or using one minute of machine A1 to process Product 2?a. Product 1b. Product 2c. They both would generate the same profit.

51、d. Cannot be determined.With one minute of machine A1, we could make 1 unit of Product 1, with a contribution margin of $24, or 2 units of Product 2, each with a contribution margin of $15. 2 $15 = $30 $2463Utilization of a Constrained ResourceThe key is the contribution margin per unit of the const

52、rained resource.Ensign should emphasize Product 2 because it generates a contribution margin of $30 per minute of the constrained resource relative to $24 per minute for Product 1.64Utilization of a Constrained ResourceEnsign can maximize its contribution margin by first producing Product 2 to meet

53、customer demand and then using any remaining capacity to produce Product 1. The calculations would be performed as follows.The key is the contribution margin per unit of the constrained resource.65Utilization of a Constrained ResourceLets see how this plan would work.66Utilization of a Constrained R

54、esourceLets see how this plan would work.67Utilization of a Constrained ResourceLets see how this plan would work.68Utilization of a Constrained ResourceAccording to the plan, we will produce 2,200 units of Product 2 and 1,300 of Product 1. Our contribution margin looks like this.The total contribut

55、ion margin for Ensign is $64,200.69Quick Check Colonial Heritage makes reproduction colonial furniture from select hardwoods.The companys supplier of hardwood will only be able to supply 2,000 board feet this month. Is this enough hardwood to satisfy demand?a. Yesb. No70Quick Check Colonial Heritage

56、 makes reproduction colonial furniture from select hardwoods.The companys supplier of hardwood will only be able to supply 2,000 board feet this month. Is this enough hardwood to satisfy demand?a. Yesb. No(2 600) + (10 100 ) = 2,200 2,00071Quick Check The companys supplier of hardwood will only be a

57、ble to supply 2,000 board feet this month. What plan would maximize profits?a. 500 chairs and 100 tablesb. 600 chairs and 80 tablesc. 500 chairs and 80 tablesd. 600 chairs and 100 tables72Quick Check The companys supplier of hardwood will only be able to supply 2,000 board feet this month. What plan

58、 would maximize profits?a. 500 chairs and 100 tablesb. 600 chairs and 80 tablesc. 500 chairs and 80 tablesd. 600 chairs and 100 tables73Quick Check As before, Colonial Heritages supplier of hardwood will only be able to supply 2,000 board feet this month. Assume the company follows the plan we have

59、proposed. Up to how much should Colonial Heritage be willing to pay above the usual price to obtain more hardwood?a. $40 per board footb. $25 per board footc. $20 per board footd. Zero74 As before, Colonial Heritages supplier of hardwood will only be able to supply 2,000 board feet this month. Assum

60、e the company follows the plan we have proposed. Up to how much should Colonial Heritage be willing to pay above the usual price to obtain more hardwood?a. $40 per board footb. $25 per board footc. $20 per board footd. ZeroQuick Check The additional wood would be used to make tables. In this use, ea