Relevant Costing and Linear Programming Flashcards

1
Q

Characteristics of a Relevant Cost

3

A
  • Future
  • Different under alternatives
  • Avoidable
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2
Q

Usually

Variable Cost - relevant or irrelevant?
Fixed Cost - relevant or irrelevant?

A

Variable cost - usually relevant

Fixed cost - usually irrelevant (sunk cost) unless they become avoidable

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3
Q

What are the relevant costs if to make?

What are the relevant costs if to buy?

Decision Rule

A

To Make
- relevant VC
- relevant FC
- opportunity costs

To Buy
- purchase costs

choose lower cost

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4
Q

Accept or Reject a Special Order
- what is the minimum selling price?

This is same to transfer pricing.

A

Full Capacity = Selling Price
Excess Capacity = Variable Cost

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5
Q

Accept or Reject a Special Order
- how to solve?

Decision Rule

A

Incremental Revenue
less : Incremental Costs

NOTE : Only incurred costs are relevant (✗ Avoidable)

choose if incremental profit

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6
Q

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?

A

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

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7
Q

Sell or Process Further
- ignore joint costs (always irrelevant)
- how to solve?

Decision Rule

A
  • SELL = sales value at splitoff
  • PROCESS = Final sales value less processing cost

choose higher revenue

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8
Q

If best product combination, what products are to be prioritized?

Best Product Combination

A

prioritize products w/ highest CM per limited resource

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9
Q

Linear Programming
- Multiple constraints
- Upgraded version of best possible combination

What are the steps (OCSC)?

A
  1. Objective Function
    max or min (ex. Z = 3A + 4B)
  2. 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
  3. Solutions feasible
  4. Choice
    max or min
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