Chapter 13 Flashcards
Cost that differs between alternatives
Relevant cost
Benefit that differs between alternatives
Relevant benefit
Focusing on future costs and benefits that differ between alternatives
differential analysis
Future cost that differs between any two alternatives
differential cost
Future revenue that differs between any two alternatives
differential revenue
Potential benefit that is given up when one alternative is selected over the other
opportunity cost
Why is using differential approach desirable?
- Rarely enough information available to prepare detailed income statements for both alternatives
- Combining irrelevant costs with relevant costs may cause confusion and distract from critical information
What are the advantages of vertical integration?
- smoother control of parts and materials
- better quality control
-realize profits
What are the disadvantages of vertical integration?
- failure to take advantage of suppliers to create economies of scale
- must be careful to retain control over
How to manage constraints?
- find the product mix consisting of products with the highest contribution margin per unit of constrained resource
- increase capacity of the bottleneck
What are ways to increase capacity of the bottleneck?
- work overtime
- subcontract some of the work
- buy additional machines
- shift workers to bottleneck activities
- reduce defective units
What is the value of a constrained resource?
Increasing capacity of constrained resource should lead to increased production in sales
A one time order not considered part of the company’s normal ongoing business
special order
When analyzing a special order, only ___________ _____ ____ _______ are relevant
Incremental costs and benefits
When a company is involved in more than one activity in the entire value chain
Vertical integration
decision to carry out one of the activities in the value chain internally
Make or buy decision
How to best utilize constrained resource?
Pick the highest CM in relation to the constrained resource
CM per constrained resource
limited resource of some type restricts the company’s ability to satisfy demand
constraint
machine or process that is limited overall output
bottleneck
