chapter 7: incremental analysis Flashcards
management’s decision making process
- identify problem and assign responsibility
- determine and evaluate possible course of action
- make a decision
- review results of the decision
financial information
revenues and costs
their effects on the company’s overall profitability
non-financial information
effect of decision on employee turnover, the environment, or company’s overall image in the community
incremental analysis
the process used to identify the financial expenses that change under alternative courses of action
also called differential analysis
when using it, either costs AND revenues vary, or, costs OR revenues vary
identifies the probably effects of decisions on future earnings
three important cost concepts used in incremental analysis
relevant cost
opportunity cost
sunk cost
relevant cost
- costs and revenues that are different for each alternative
- costs and revenues that will occur in the future
not the same as sunk cost
opportunity cost
the lost benefit from choosing one action over the other
sunk cost
costs that have already been incurred
they will not be changed or avoided by any future decision
should not affect decision of the future
not the same as relevant cost
quantitative factors that affect a decision
attributes that can be expressed in numbers or $
why is activity based costing useful for the incremental analysis approach?
better associates actual increases in overhead costs
better identification of relevant costs
most common incremental analysis decision types
- accept an order at a special price
- make or buy component parts or finished products
- sell products or process them further
- retain or replace equipment
- retain or eliminate unprofitable business segment
- allocate limited resources
price concession for a customer
lowering prices for a customer
if a firm operates at full capacity, will a special order usually accepted or rejected?
usually rejected
outsourcing
manufacturer’s decision to make or buy parts for assembly
when should you keep making and when should you sell?
keep making when revenues from making it some more exceed the extra costs
joint products
several end products produced from a single raw material
they are a common production process?
joint product costs
all costs that are incurred before the point point at which the two products are separately identifiable
these are sunk costs
they have already been incurred and the company cannot either change or avoid them
if you want to replace machinery, is it relevant to know how much you going to get from it if you sell it?
yeee boyyy
if you want to replace machinery, is it relevant to know the book value of the machine you trying to sell?
naaah boy
its sunk costs
it does not affect the future decision
f you want to replace machinery, is it relevant to know the costs of past reparations?
naaah boy
its sunk costs
it does not affect the future decisions
contribution margin of each limited resource
contribution margin per unit / number of limited resources required per unit
theory of constraints
approach of evaluating constraints
managing constraints to improve results
