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Relevant Costing
Qualitative
Factors in a decision problem that cannot be
expressed effectively in numerical terms.
Usefulness of information is
determined by its:
Relevance
Information is pertinent to a decision problem.
Relevant information is different under competing courses
of action, it relates to the future, provides a balance
between accuracy and timeliness, and may consist of both
quantitative and qualitative information.
Accuracy
Information is reasonably precise.
Timeliness
Information is available in time for a decision to be made.
Differential costs
Incremental costs
Opportunity costs
Avoidable costs
Out of pocket costs
Sunk costs
Committed costs
Non-cash costs
Unavoidable costs
Future costs that do not differ between alternatives.
1,000,000
240,000
10,000
150,000
120,000
180,000
100,000
200,000
140,000
60,000
400,000
600,000
800,000
(200,000)
General Factory Overhead and General Administrative Expenses are unavoidable costs.
Assume that the equipment used in manufacturing digital instruments has no resale value or
alternative use.
MAKE OR BUY
P 8.20
8.30
1.20
4.30
P22.00
Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 70%
is avoidable if the component were bought from the outside supplier. In addition,
making the component uses 2 minutes on the machine that is the company's current
constraint. If the component were bought, this machine time would be freed up for
use on another product that requires 4 minutes on the constraining machine and that
has a contribution margin of P7.00 per unit.
When deciding whether to make or buy the component, what are the relevant costs to
make the component
ADDING A
PRODUCT
LINE OR
SEGMENT
P
P
P
10,000,000
(3,000,000)
7,000,000
(2,000,000)
5,000,000
KEEPING OR DROPPING A
PRODUCT LINE OR
SEGMENT
What is it?
Aluminum
P200,000
140,000
P 60,000
35,000
P 25,000
Hard Rubber
P 65,000
58,000
P 7,000
22,000
P (15,000)
Total
P765,000
523,000
P242,000
132,000
P110,000
Requirement 1: Assume that none of the fixed expenses for the hard rubber are
avoidable. What will be the total net income if the line is dropped? What should be
ABCs decision?
Requirement 2: Assume that all of the fixed expenses for the hard rubber line are
avoidable. What will be the total net income if that line is dropped? What should be
ABCs decision?
Requirement 3: If the total net income after dropping the hard rubber line is P105,000,
what is the amount of avoidable fixed expenses for hard rubber line?
LEASE OR OPERATE
Lease or Operate
What is it?
Decisions may either be in the point of view of the lessee or the lessor.
Point of view of lessee: Decisions that need to be made when a firm is
deciding on whether to lease equipment or to operate its own
equipment in pursuance of organizational goals.
Point of view of lessor: Decisions that need to be made when a firm is
deciding what to do with its equipment whether it will sell the
equipment or let the equipment be leased.
Lease or Operate
Common relevant information in the decision to lease
or operate:
Lease payments.
Foreseeable repairs and maintenance expenses.
Opportunity costs.
SELL AS IS
OR
PROCESS
FURTHER
Joint
Input
Joint
Costs
Oil
Common
Production
Process
Gasoline
Chemicals
Split-Off
Point
Separate
Processing
Final
Sale
Final
Sale
Separate
Processing
Separate
Product
Costs
Final
Sale
AB
P16,000
P6,000
P20,000
P5,000
CD
P12,000
P6,000
P18,000
P3,000
EF
P5,000
P6,000
P9,000
P2,000
SHUT DOWN OR
CONTINUE OPERATIONS
P200
P80
P20
Monthly fixed OH
Monthly fixed Expenses
Regular Sales in Units
P800,000
P500,000
20,000/month
ACCEPT OR REJECT A
SPECIAL ORDER
EQUIPMENT
REPLACEMENT DECISIONS
90,000
80,000
5 years
72,000
60,000
15,000
100,000
5 years
Taylors sales are P200,000 per year. Fixed expenses (other than amortization)
are P70,000 per year. Should Taylor purchase the new machine?
UTILIZATION OF SCARCE
RESOURCES
Grinding minutes/unit
Selling price/unit
Variable selling cost/unit
Monthly demand in units
Prod. A
2.60
P69.50
P 1.60
4,000
Prod. B
1.80
P74.80
P 1.50
2,000
Prod. C
2.50
P59.50
P 2.60
3,000
Prod. D
1.40
P59.60
P 3.40
4,000
The grinding machines are potentially the constraint in the production facility. A total of 24,500
minutes are available per month on these machines. Direct labor is a variable cost in this
company.
FINANCING VS.
INVESTING DECISIONS
Financing
Deals with how to acquire money, and the most common ways to
do this is to use the companys own money (retained earnings) or
by raising money externally (debt, issuing stocks)
Probability
15%
25%
20%
25%
15%
Y Returns
20%
10%
8%
14%
20%
Z Returns
24%
15%
6%
1%
5%
Nothing Follows