Chapter 12 Flashcards
What Costs are Relevant?
Any cost that is avoidable (would differ among alternatives) is relevant
All costs are avoidable EXCEPT
- Sunk costs (costs that have already been incurred).
2. Future costs that do not differ.
Fixed Costs are not always
unavoidable
variable costs are not
always avoidable
Avoidable costs (costs that differ among alternatives) are
relevant.
Special orders
the price of a special order must be higher than the additional relevant costs. In most cases this will be variable costs plus opportunity costs.
Outsourcing is
a make-buy decision
Drop or keep a product
A product should be dropped when fixed cost avoided are greater than the contribution margin lost.
Constrained resources
Select the item with the highest contribution margin per constrained resource
Constrained Resources Formula
CM per unit = CM per limited resource
constrained resource per unit
Joint Product
: Sell or process further. Process further if
additional revenue is greater than additional costs.
Joint costs are sunk (and thus not relevant).
Constrained resource =
synonyms
scarce resource = limited resource
When are special orders profitable?
if incremental revenue exceeds the incremental cost
Special Order: What is important when considering taking on a special order?
- idle capacity
- should not cut into normal units or undercut normal prices
Make Buy: if equipment can be sold whats relevant and so on?
- its salvage value would be relevant
- or if the machine could be used to make other products as well
Make Buy: how is depreciation sometimes treated?
Because the equipment has already been purchased, this depreciation is a sunk cost and is therefore irrelevant
Special order
is a one-time order that is not considered part of the company’s normal ongoing business.
joint products.
Two or more products that are produced from a common input
split-off point
is the point in the manufacturing process at which the joint products can be recognized as separate products
joint costs are a
common cost of all of the intermediate and end products and should not be allocated to them for purposes of making decisions about the individual products.
Once the split-off point is reached, the joint costs have already been
incurred and nothing can be done to avoid them
Are joint cost irrelevant?
yes from the split point forward
SO: Variable Costs
have already been incurred because the product has already been produced
JC: Discuss joint costs?
Joint costs are irrelevant in decisions regarding what to do with a product from the split-off point forward. Once the split-off point is reached, the joint costs have already been incurred and nothing can be done to avoid them.
