# Managerial Accounting An Introduction To Concepts_ Methods_ And by yurtgc548

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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)

differential analysis to product choice
decisions.
    Explain the theory of constraints.
    Identify the factors underlying make-or-
    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
Decisions
Define the Following
 Split-Off Point

 Joint Costs