Chapter 23
Relevant Costing for
Managerial Decisions
Short-Run Decision Making
• Managers are asked to make lots of
decisions that affect the current operating
period only
Common decision types
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

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outsourcing decisions (make or buy)
special orders,
product mix,
profitability of a segment
(just to name a few)
Short-Run Decision Making
Five steps for short-run decisions
1.
2.
3.
4.
5.
Define task & goal
Identify alternatives
Collect relevant information
Select course of action
Analyze and assess decision
Short Run Decision
(Incremental) Analysis
• _______ analysis is a tool that we use to make
decisions about competing alternatives.
• In evaluating alternatives, focus on the additional
revenues and costs for each alternative. These
are relevant (costs or revenues) to the decision.
• Revenues and costs that remain
the same are _______!
• _______ costs are never relevant.
 Sunk costs are costs that were
incurred in the past and can’t be
changed. They are irrelevant!
Other Considerations
• _______ costs require a future outlay of cash
and are relevant to current and future decision
making.
• _______ costs may exist! Consider them!
 Opportunity cost is a measure of revenue that is lost
by choosing one alternative over another.
• Use the contribution margin approach
to analyze alternatives.
• _______ information may be
relevant when choosing between
alternatives.
Special Order
• Should a special order be accepted?
 Calculate revenue from order.
 Calculate _______ costs of accepting order.
• Variable costs will increase.
• Fixed costs may or may not increase.
 Accept the order if it is _______
 Assuming
• Sales of other products will not be affected.
• Full capacity has not been reached.
Outsourcing Decisions
(Make or Buy?)
• Outsourcing - the acquisition of products or
services from an entity outside our own.
 Often, companies outsource non-value added
activities such as payroll processing.
• Outsourcing may save money and allow
companies to focus on what they are good at.
• Problems can exist as well, so must make sure
that the benefits outweigh all the costs.
Outsourcing: Make or Buy
• Is it cheaper to buy a part or to make it
ourselves?
• Compare the cost to make and the cost to
purchase it.
 Consider that not all fixed costs go
away when purchasing not making.
 Cost to _______ = VC of buying +
remaining fixed costs + opportunity
cost of making
 Cost to ____ = VC + FC to produce.
Sell or Process Further?
• Should an item be processed further or sold?
 Process further if the incremental
revenues ______ the incremental
costs of processing.
 Costs incurred to date are
irrelevant (sunk costs).
 Fixed costs may/may not change.
Only include in analysis if they
increase or decrease.
Allocation of Limited Resources:
Product Sales Mix
• When deciding which items to produce, consider the
relative sales mix of items.
• Maximize the contribution margin of products sold.
• Consider when one product consumes more of a
limited resource than another.
 Calculate the CM per unit of limited resource to
decide which products to emphasize.
• If all products require same facilities and market for
products is unlimited, produce the product with the
highest contribution margin.
Eliminate Unprofitable Segments
Sometimes company segments appear to be losing money.
If those segments are eliminated, will the company be
better off?
It depends!
 If the fixed costs allocated to the eliminated segment
are unavoidable (they continue to exist), those costs
must be reallocated to other departments.
Decision rule
 Segment is candidate for elimination if revenues are
less than its avoidable expenses.
 Also consider the impact on other segments.
The END