Relevant Costing and Linear Programming Flashcards
Characteristics of a Relevant Cost
3
- Future
- Different under alternatives
- Avoidable
Usually
Variable Cost - relevant or irrelevant?
Fixed Cost - relevant or irrelevant?
Variable cost - usually relevant
Fixed cost - usually irrelevant (sunk cost) unless they become avoidable
What are the relevant costs if to make?
What are the relevant costs if to buy?
Decision Rule
To Make
- relevant VC
- relevant FC
- opportunity costs
To Buy
- purchase costs
choose lower cost
Accept or Reject a Special Order
- what is the minimum selling price?
This is same to transfer pricing.
Full Capacity = Selling Price
Excess Capacity = Variable Cost
Accept or Reject a Special Order
- how to solve?
Decision Rule
Incremental Revenue
less : Incremental Costs
NOTE : Only incurred costs are relevant (✗ Avoidable)
choose if incremental profit
Continue or Shutdown
FC can be classified into
- traceable (direct) = relevant
- common (indirect) = allocated to other branch
How to solve Segment Margin?
How to solve shutdown point?
Segment Margin
- CM less Traceable FC
- Continue if Positive, Shutdown if Negative
Shutdown Point
- FC less SDC / UCM
- SDC is unavoidable
- Continue if above, Shutdown if below
Sell or Process Further
- ignore joint costs (always irrelevant)
- how to solve?
Decision Rule
- SELL = sales value at splitoff
- PROCESS = Final sales value less processing cost
choose higher revenue
If best product combination, what products are to be prioritized?
Best Product Combination
prioritize products w/ highest CM per limited resource
Linear Programming
- Multiple constraints
- Upgraded version of best possible combination
What are the steps (OCSC)?
-
Objective Function
max or min (ex. Z = 3A + 4B) -
Constraint Functions
Function 1 (ex. 2A + 5B < 120)
Function 2 (ex. 4A + 2B < 80)
Equate A or B as 0 in both functions
Last is add the 2 functions and eliminate either A or B to get their value - Solutions feasible
-
Choice
max or min