Management
Accounting: The
Cornerstone for
Business Decisions
Short-Run Decision
Making; Relevant Costing
and Inventory Management
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Learning Objectives
1. Describe the short-run decision-making
model and explain how cost behavior
affects the information used to make
decisions.
2. Apply relevant costing and decisionmaking concepts in a variety of
business situations.
3. Choose the optimal product mix when
faced with one constrained resource.
Learning Objectives
4. Explain the impact of cost on pricing
decisions.
5. Discuss inventory management under
the economic order quantity and JIT
models.
Illustrate Make or Buy
Decision
What are the steps of the
decision model?
12-1
How to structure a make or
buy problem.
Buttons Manufacturing needed to determine if it would be
cheaper to make 12,000 units of a component in house or
purchase them from an outside supplier for $4.80 each.
Absorption-costing information for internal production
includes the following :
Total Cost
Unit Cost
Direct materials
$12,000
$1.00
Direct labor
24,000
2.00
Variable overhead
10,200
0.85
Fixed overhead
52,800
4.40
Total
$89,000
$8.25
Fixed overhead will continue whether the component is
produced internally or externally. No additional cost of
purchasing will be incurred beyond the purchase price.
12-1
How to structure a make or
buy problem.
REQUIRED:
1.
2.
3.
4.
What are the alternatives for Buttons Manufacturing?
List the relevant cost(s) of the internal production and
external purchase.
Which alternative is more cost effective and by how
much?
Now assume that the fixed overhead includes $12,000 of
cost that can be avoided if the component is purchased
externally. Which alternative is more cost effective, and
by how much?
Calculation:
1.
12-1
2.
3.
How to structure a make or
buy problem.
12-1
4.
How to structure a make or
buy problem
Illustrate Accept a Special
Order Decision
12-2
How to structure a specialorder problem.
Leibnitz Company has an offer by a new customer to
purchase 22,000 units of model BL7 for $8 each. The
new customer is geographically separated from the
company’s other customers, and existing sales would
not be affected. Leibnitz normally produces 100,000
units of BL7 per year but only plans to produce and
sell 75,000 in the coming year. The normal sales price is
$14 per unit. Unit cost information is as follows:
Direct material
$2.50
Direct labor
2.30
Variable overhead
1.50
Fixed overhead
2.00
Total
$8.30
12-2
How to structure a specialorder problem.
Fixed overhead will not be affected whether or
not the special order is accepted.
REQUIRED:
1. What are the relevant costs and benefits of
the two alternatives (accept or reject the
special order)?
2. By how much will operating income increase
or decrease if the order is accepted?
Calculations:
12-2
How to structure a specialorder problem.
2. If the problem is done on the unit
basis:
How to structure a keep-or12-3 drop product line problem.
The roofing tile line has a contribution margin of $15,000
(sales of $160,000 less variable expense of $145,000). All
variable costs are relevant. Relevant fixed costs
associated with this line include $15,000 in advertising
and $35,000 in supervision.
REQUIRED:
1.
2.
3.
List the alternatives being considered.
List the relevant benefits and costs for each alternative.
Which alternative is more cost efficient and by how
much?
Calculation:
1.
How to structure a keep-or12-3 drop product line problem.
2.
3.
12-4
How to structure a keep-or-drop
product line problem with
complementary effects.
Dropping the product line reduces sales of blocks
by 8% and sales of bricks by 10%. All other
information remains the same.
REQUIRED:
1. If the roofing tile line is dropped, what is the
contribution margin for the block line? For the
brick line?
2. Now which alternative (keep or drop the
roofing tile line) is more cost effective, by how
much?
How to structure a keep-or-drop
product line problem with
12-4
complementary effects.
Calculation:
12-4
2.
How to structure a keep-or-drop
product line problem with
complementary effects.
How to structure the sell-or12-5 process further decision.
Appletime must decide to whether to sell Grade B pears at
the split-off or process further for pear sauce. The
company normally sells Grade B pears in units of 120 5lb
bags at a net price of $1.20 per bag. If the pears are
processed further the result would be 500 cans of sauce
with an additional cost of $0.19 per can. The buyer will
pay $0.85 per can.
REQUIRED:
1. What is the contribution margin from selling the Grade B
pears in the 5lb bag?
2. What is the contribution to income from processing the
the Grade B pears in to pear sauce?
3. Should they sell the pears in bags or process them further?
How to structure the sell-or12-5 process further decision.
Calculation:
Illustrate Further Processing
Decision
12-6
How to determine the optimal
product mix with one constrained
resource.
Jorgeson Company produces two types of gearboxes, X2 and
Y3 with unit contribution margins of $50 and $20,
respectively. Each gearbox must stamped by a special
machine. The company owns four machines that provide
20,000 hours of machine time per year. Gearbox X2
requires 1 hour of machine time, while gearbox Y3
requires 0.25 hour of machine time. There are no other
constraints.
REQUIRED:
1. What is the contribution margin per hour of machine
time per gearbox?
2. What is the optimal mix of gearboxes?
3. What is the total contribution margin for the optimal
mix?
12-6
How to determine the optimal
product mix with one constrained
resource.
Calculation:
12-7
How to determine the optimal
product mix with one constrained
resource and a sales constraint.
Everything is exactly the same as Cornerstone 12-6
with the addition that only a maximum of 50,000
units of either gearbox can be sold.
REQUIRED:
1. What is the contribution margin per hour of
machine time per gearbox?
2. What is the optimal mix of gearboxes?
3. What is the total contribution margin for the
optimal mix?
Calculation:
12-7
How to determine the optimal
product mix with one constrained
resource and a sales constraint.
12-7
3.
How to determine the optimal
product mix with one
constrained resource and a sales
constraint.
12-8
How to calculate price by applying
a markup percentage to cost.
Elvin Company assembles and installs computers
to customer specifications. Elvin had decided to
price its jobs at the cost of direct materials and
direct labor plus 20%. The job for a local middle
school included the following costs:
Direct materials
$150,000
Direct labor
10,000
REQUIRED: Calculate the price charged by
Elvin Company to the middle school.
Calculation:
12-9
How to calculate a target
cost.
Digitime’s new pocket watch plus PDA has a
target price $175. Management requires a 20%
profit on new products.
REQUIRED:
1. Calculate the amount of desired profits.
2. Calculate the target cost.
Calculation:
1. Desired profit
2. Target cost
=
=
Match Definitions
Ordering
Costs
Carrying
Costs
Stockout
Costs
EOQ
The costs of having inventory on
hand
The cost of placing and receiving
an order of inventory
A mathematical model to
determine how much inventory
should be ordered and when
The costs of not have a product
available when a customer
demands it
How to calculate ordering cost,
carrying cost, & total inventory12-10
related cost.
Mall-o-Cars, Inc., sells a number of automotive brands and
provides service after the sale of those brands. Part Z9T
is used in the repair of window switches ( the part is
purchased from external suppliers). Each year 5,000 Z9T
are used; they are currently purchased in lots of 500
units. It costs Mall-o-Cars $25 to place the order and the
carrying cost is $2 per part per year.
REQUIRED:
1. How many orders for Part Z9T are placed per year?
2. What is the total ordering cost of Part Z9T per year?
3. What is the total carrying cost of Part Z9T per year?
4. What is the total cost of Mall-o-Car’s inventory for Part
Z9T per year?
How to calculate ordering cost,
carrying cost, & total inventory12-10
related cost.
Calculation:
1.
2.
3.
4.
12-11
How to calculate the EOQ, ordering
cost, carrying cost, and total inventoryrelated cost.
Mall-o-Cars, Inc., sells a number of automotive brands and
provides service after the sale of those brands. Part Q6B
is used in the repair of window trim. Each year 20,000
Q6B are used; they are currently purchased in lots of
2,000 units. It costs $40 to place the order and the
carrying cost is $2.50 per part per year.
REQUIRED:
1. What is the EOQ for Part Q6B?
2. How many orders for Part Q6B does Mall-o-Cars place
per year?
3. What is the total ordering cost of Part Q6B per year?
4. What is the total carrying cost of Part Q6B per year?
5. What is the total cost of Mall-o-Car’s inventory for Part
Q6B per year?
How to calculate ordering cost,
carrying cost, & total inventory12-11
related cost.
Calculation:
1.
2.
3.
4.
5.