Learning Unit 2 - relevant costing

Question 1

What are long term decisions

Answer 1

Decisions that have a time frame exceeding one year. Typically characterized by large capital investments and the benefits accrue over a period more than one year.

Question 2

What are the three types of short terms decisions management must make (as per Chapter 10 POMA, pg 292)

Answer 2

Special orders
Make-or-buy decisions
Closing down of a part of the business

Question 3

What are special orders?

Answer 3

Special orders are generally characterized by an organisation being approached by an external party:
- to supply a similar product to its existing product line in a different market
- to modify the existing product to suit the needs of the external party

Question 4

What is the equation for determining whether to accept special orders? (POMA, pg 297)

Answer 4

Incremental benefit of a special order =
Additional income from accepting the special order - additional costs that will be incurred if the special order is accepted.

Question 5

What are “make-or-buy” decisions (also know as outsourcing)?

Answer 5

Evaluates the decision to manufacture a component internally in contrast to acquiring it from an external party (outsourcing).

Question 6

What is a constraint? (POMA PG330)

Answer 6

A limiting factor or constraint is a scarce resource of which there is a limited supply which affects the ability of an organization to earn maximum profits.

Question 7

List three examples of constraints.

Answer 7

Shortage of manpower
Limited machine capacity
Scarce raw materials

Question 8

What is shadow pricing? (POMA Pg 339)

Answer 8

A shadow price is the increase in contribution which would be created by having available one additional unit of a limiting resource at the original cost.