Marginal Analysis Flashcards
What is marginal analysis?
it focuses on the relevant revenues and costs that are associated with a decision (accept/reject a special order, make/buy a product or service, add/drop a segment, etc.)
What are direct costs?
costs that can be identified with or traced to a given cost object; direct costs are usually relevant (variable costs are generally direct costs)
What are prime costs?
DM and DL costs, which are generally relevant
What are discretionary costs?
costs arising from periodic (usually annual) budgeting decisions by management to spend in areas not directly related to manufacturing (ex. maintaining landscaping); discretionary costs are generally relevant
What are incremental costs?
aka marginal costs, differential costs, or out-of-pocket costs
the additional costs incurred to produce an additional amount of the unit over the present output; incremental costs are relevant costs and include all variable costs and any avoidable fixed costs associated with a decision
What are opportunity costs?
the cost of foregoing the next best alternative when making a decision; opportunity costs are relevant costs
What are irrelevant costs?
costs that do not differ among alternatives are irrelevant and should be ignored in a marginal cost analysis
What are sunk costs?
costs that are unavoidable because they were incurred in the past and cannot be recovered as a result of a decision; they are not relevant costs
What are controllable costs?
costs that are authorized by the business unit manager or the decision maker; the ability to control cost is evaluated when analyzing business decisions; they are relevant if they will change as a result of selecting different alternatives
What are uncontrollable costs?
costs that were authorized at a different level in the organization; they are not relevant costs because they cannot be changed by the manager making the decision
What are avoidable costs and revenues?
if they result from choosing one course of action instead of another; as a result, the firm avoids the cost and revenue associated with the course of action not selected; they are relevant to the decision
What are unavoidable costs?
they are the same regardless of the chosen course of action and are not relevant to future decisions; they will continue regardless of the course of action taken
What are special order decisions?
opportunities that require a firm to decide whether a specially priced order should be accepted or rejected; they are short-term decisions that often assume excess capacity; fixed costs are generally not relevant to these decisions unless the special order will change total fixed costs
What are make vs buy decisions?
aka insourcing vs outsourcing
it is similar to the special order decision in that managers should select the lowest-cost alternative
What are sell or process further decisions?
the decision regarding additional processing is made based on profitability
if the incremental revenue exceeds the incremental cost, the organization should process further
if the incremental cost exceeds the incremental revenue, the organization should see at the split-off point
What are joint costs?
costs of a single process that yields multiple products; they cannot be traced to an individual product and are sunk costs that are not relevant to decisions of whether to sell or to process further
What are separable costs?
costs incurred after the split-off point that can be traced to individual products and are relevant to decisions of whether to sell or to process further
What are keep or drop decisions?
relevant costs should be used to determine whether to keep or drop a business segment
the fixed costs associated with the segment must be identified as either avoidable (relevant) or unavoidable, even if the segment is discontinued
a firm should compared the fixed costs that can be avoided if the segment is dropped to the contribution margin that will be lost if the segment is dropped
keep the segment if the lost contribution margin exceeds avoided fixed costs
drop the segment if the lost contribution margin is less than avoided fixed costs
