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					Managerial Accounting:
   An Introduction To Concepts,
        Methods, And Uses

         Chapter 7
 Differential Cost Analysis
  for Operating Decisions


      Maher, Stickney and Weil
    Learning Objectives (Slide 1 of
                        3)

    Explain the differential principle & know
     how to identify costs for differential
     analysis.
    Explain the relation between costs &
     prices.
    Explain how to base target costs on
     target prices.
    Describe how to use differential analysis
     to measure customer profitability.
    Learning Objectives (Slide 2 of
                        3)

    Explain why businesses apply
     differential analysis to product choice
     decisions.
    Explain the theory of constraints.
    Identify the factors underlying make-or-
     buy decisions.
    Explain how to identify the costs of
     producing joint products & the relevant
     costs for decisions to sell or process
     further.
    Learning Objectives (Slide 3 of
                        3)
    Explain the use of differential analysis to
     determine when to add or drop parts of
     operations
    Identify the factors of inventory
     management decisions.
    Explain how linear programming
     optimizes the use of scare resources
     (Appendix 8.1)
    Identify the use of the economic order
     quantity model (Appendix 8.2)
 Describe & Define
Differential Analysis
 Differential Analysis Model
                Alternative -   Status Quo =   Difference
  Revenue         Revenue        Revenue       Change in
                                               Revenue
Less Variable                                  Change in
 Costs (VC)         VC -           VC =           VC
   Total
Contribution                                   Change in
Margin (CM)         CM              CM            CM
 Less Fixed                                  Change in
   Costs        Fixed Costs - Fixed Costs = Fixed Costs
 Operating                                   Change in
  Profit           Profit -      Profit =      Profit
   Differential Analysis Cont.
 A cost (or revenue) is relevant only if it
  differs between alternatives under
  consideration
 Focus is typically on cash flows
  because:
   Cash is the medium of exchange
   Cash is a common, objective measure of
    benefits and costs of alternatives
What are the three major
 influences on pricing?
 Review Short-Run vs. Long-
   Run Pricing Decisions
 Time horizon of a decision is
  important in determining relevant
  costs in a pricing decision

   Short-run decisions include pricing for a
    one-time special order

   Long-run decisions include pricing a
    main product in a major market
What is the differential
 approach to pricing?
  Long-Run Pricing Decisions
                (Slide 1 of 3)

 Define Full cost
Review the Value Chain
 Long-Run Pricing Decisions
                 (Slide 3 of 3)

 Full cost approach is justified in
  pricing decisions when:
   Entering into long-term contracts to
    supply a product
   Developing and producing a customized
    product
   Initially setting prices, then adjusting for
    market conditions
Review Life-Cycle Product
   Costing and Pricing
Explain Using Target Prices
    to Set Target Costs
 Explain Legal Issues
Relating Costs to Prices
    Customer Profitability
 Differential analysis is useful in
  determining which customers to keep
  or drop
   Dropping a customer should result in
    cost savings in excess of lost revenue
   Alternative uses of extra capacity
    available after dropping a customer
    should be included in the analysis
  What are the four general
categories of customer costs?
Customer costs generally consist of the
following 4 categories of activities:




ABC provides a better understanding of
the cost of these activities
Build a Chart of Activities to
 Compute Customer Costs
Comment on Decisions when
Scarce Resources are Limited
Decisions with Scarce
     Resources
     Define the Following
 Theory of Constraints




 Bottleneck




 Throughput Contribution
List the Five Steps to
Managing Bottlenecks
Name Three Options to
 Relieve a Bottleneck
Explain Make or Buy
     Decisions
     Define the Following
 Split-Off Point


 Joint Costs




 Additional Processing Costs
How do you decide whether
 to process further or not?
If you have any comments or suggestions concerning this
PowerPoint Presentation for Managerial Accounting, An
Introduction To Concepts, Methods, And Uses, please contact:

               Dr. Michael Blue, CFE, CPA, CMA
                       blue@bloomu.edu
            Bloomsburg University of Pennsylvania

				
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