Slide Deck 3 Flashcards
Managerial Accountants must:
-Objectively use high quality data and analytics tool
-Distinguish relevant from irrelevant info
-Recognize limitations of data quality
-Not take Impulsive action
+ Often relevant info can be missing
Uncertainty Vs Risk:
U: Outcomes now contemplated during decision making process
R: Outcomes that have been contemplated
For future expected cost and revenues to be considered relevant they must:
- Occur in the future
- Differ among that alternative courses of action
4 Key Features of Relevant Information:
- Past costs helpful for predictions, but not useful for making decisions (Sunk Cost are always irrelevant)
- Dif alt can be compared by examining difference in expected total future revenues and expected total future cost
- Not all expected future rev and expect future Cost are relevant. (If they don’t differ, it don’t matter)
- Appropriate weight must be given to qualitative factors and quantitative non-financial factors
2 Problems with Relevant Cost Analysis
- Making General Assumptions about Information
2.Unit-cost data can potentially mislead decision makers
- Irrelevant costs included unit-cost decision makers(Ie cost asscoiated with one time special order)
- Using the same unit costs at different output levels
(FCPU changes with different ouput levels)
2 ways to avoid problems with relevant cost analysis
- Focus on total revenues and total cost, not their per-unit equivalent
2.Continually evaluate data to ensure that it meets the requirement of relevant info
Opportunity Cost:
+ Holding/Carrying Cost:
The contribution to Operating Income that is foregone by not using a limited resource in its next best alterative user (What did you lose by not doing this?)
- Funds tied up inventory are not available for investment elsewhere (A special kind of opportunity cost that can be avoided by proper inventory management)
Types of Decisions:
4 Capacity and Facility Usage
1 Operational
- One-time only special order
- Insourcing vs outsourcing
- Make or buy
- Product- Mix
- Equipment Replacement
One Time Only Special Order Decisions.
Decision Rules:
+Qualitative Considerations
As long as there is capacity, there are no opportunity Costs
Does the special order generate additional income?
Yes? Accept.
No? Reject.
Compare relevant revenue and relevant cost to determine profitability
Qualitative:
Does the order impact normal customers?
Is there potential business in the future with the special order people?
Do a one time special order Exercises Either on Pearson or the slides.
Please.
Insourcing vs Outsourcing:
Make vs Buy:
Decision rule:
Insourcing: Expanding existing capacity to produce more in-house. (Vertical integration, protect competitive adv, control)
Outsourcing: Additional external production
Consider Quality, dependability, cost.
Select the option that will provide the firm with lowest cost, and therefore the highest profit.
Do Insourcing vs Outsourcing Exercise.
Pearson or Slide.
Product Mix Decision:
Decision Rule:
Which product to sell and how many of them. (Normally only happens with capacity constraints)
To determine product mix, a company maximizes operating income, subject to constraints such as capacity and demand.
Choose that product that produces the highest contribution margin per unit on the constraint resource.
Do a Product Mix exercise
Pearson or Slides.
Please
Theory of Constraints:
Desc:
It suggests that orgs can be measured and controlled by variations in:
Descrives methods to maximize operating income when faced with some bottle neck and some non bottle neck operations.
-Operation income
-Operational expenses
-Investment
