10-1
Adapted by Cynthia Fortin, CPA, CMA
Introduction to Managerial Accounting, Brewer,
Garrison,Noreen
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
10-2

http://video.wileyaccountingupdates.com/20
11/03/29/incremental-analysis-andmanagements-decision-making-process/
10-2
10-3
Costs and
benefits
that differ
between
alternatives
Costs that
are
avoidable
10-3
10-4


Incremental :
added costs or
revenues
Differential :
difference of
costs and revenue
between
alternatives
10-4
10-5
1.
only on relevant
costs
2. Ignore sunk costs and future
costs and benefits that do not
differ between the alternatives.
10-5
10-6
3. Consider qualitative
information is vital to
decision-making.
10-6
10-7
Costs that are
relevant in
one decision
situation may
not be
relevant in
another
context.
10-7
10-8
Each decision
situation
requires the
manager to
examine the
data at hand
and isolate
the relevant
costs.
10-8
10-9
1. Only rarely
will enough
information
be available
to prepare
detailed
income
statements for
both
alternatives.
10-9
10-10
2. Mingling irrelevant
costs with relevant
costs may cause
confusion and
distract attention
away from the
information that is
really critical.
10-10
10-11
or
1. Calculate Contribution margin that would
disappear if segment is dropped. Put results
as negative.
2. Calculate fixed costs that would disappear if
segment is dropped.
3. Add (1) to (2). If result is negative
4. Evaluate significant qualitative consequences.
10-11
10-12
or
1. Calculate Contribution margin that would
disappear if segment is dropped. Put results
as negative.
2. Calculate fixed costs that would disappear
if segment is dropped.
3. Add (1) to (2). If result is negative
4. Evaluate significant qualitative consequences.
10-12
10-13
The management of Bayside Company is
considering whether one of the
departments in its retail stores should
be eliminated.
The contribution margin in the
department is $150,000 per year.
Fixed expenses allocated to the
department are $130,000 per year.
It is estimated that $120,000 of these
fixed expenses will be eliminated if
the department is discontinued.
Part (a)
Which costs are irrelevant to this
decision?
The common fixed costs of $10,000 (or
$130,000 - $120,000) are irrelevant to this
decision.
10-13
10-14
Part (b)
If the department is eliminated, what will be the
impact on the company’s overall net operating
income?
CM that would be lost if department is discontinued $(150,000)
Less fixed costs that can be avoided if department
is discontinued
120,000
Increase (decrease) in net operating income
(30,000)
Based on this information alone, because the company’s net
operating income would decrease by $30,000 per year,
management should
this department.
10-14
10-15
Outsourcing:
•
Purchasing goods
or services from
outside vendor or
supplier.
Insourcing:
•
•
Producing goods or services within
an organization
May require expanding to increase
capacity
10-15
10-16
1. Calculate total amount to
pay supplier.
2. Calculate total differential
costs if company chooses
to make.
3. Calculate difference
between the 2 options.
4. Select lowest cost option.
5. Analyze qualitative factors
10-16
10-17
• Logistical
considerations
 distance from plant
10-17
10-18
•
Dependance on supplier can
increase risk:
10-18
10-19
10-19
10-20
Idle space (caused by
outsourcing) that has no
alternative has an opportunity
cost of $ 0.
10-20
10-21
•No longterm implications
•There is existing idle capacity
•Usually the price is lower than the regular product
•There are variable and fixed relevant costs incurred
10-21
10-22
•Company must decide if the decision creates
incremental net operating income
•Fixed costs are sunk costs, therefore irrelevant
•Absorption costing is not appropriate in the
decision
10-22
10-23
1.
Calculate total revenue
generated by special
order
2.
Calculate total
incremental costs
3.
3. (1) – (2) => if positive
accept the order
10-23
10-24
4. Will this impact regular
customers?
5. Is there potential future
business?
10-24
10-25
Effectively managing the
constraint is the key to success.
10-25
10-26
2. Allow the
weakest link to
set the tempo.
Only actions
that
strengthen the
weakest link in
the “chain”
improve the
process.
3. Focus on
improving
the weakest
link.
1. Identify the
weakest link.
4. Recognize that
the weakest link
is stronger.
10-26
10-27
1.
2.
3.
Calculate each product’s Contribution
Margin (CM) per unit.
Identify constraining resource and the
quantity of that resource that is
consumed by the unit.
Divide (CM) by unit of constrained
resource.
10-27
10-28
4. Rank products from highest CM to
lowest CM.
5. The CM must be viewed in relation to
the amount of the constrained
resource each product requires.
10-28
10-29
Increase the capacity of a bottleneck, called
relaxing constraint, such as:
1. Working overtime on the bottleneck.
2. Subcontracting some of the processing that
would be done at the bottleneck.
3. Investing in additional machines at the
bottleneck.
10-29
10-30
4. Shifting workers from non-bottleneck
processes to the bottleneck.
5. Focusing business process improvement
efforts on the bottleneck.
6. Reducing defective units processed
through the bottleneck.
10-30
10-31
Colonial Heritage makes reproduction colonial
furniture from select hardwoods.
Chairs
Selling price per unit
$80
Variable cost per unit
$30
Board feet per unit
2
Monthly demand
600
Tables
$400
$200
10
100
The company’s supplier of hardwood will only
be able to supply 2,000 board feet this month. Is
this enough hardwood to satisfy demand?
a. Yes
b. No
10-31
10-32
Colonial Heritage makes reproduction colonial
furniture from select hardwoods.
Chairs
Selling price per unit
$80
Variable cost per unit
$30
Board feet per unit
2
Monthly demand
600
Tables
$400
$200
10
100
The company’s supplier of hardwood will only
be able to supply 2,000 board feet this month. Is
this enough hardwood to satisfy demand?
a. Yes
b. No
(2  600) + (10  100 ) = 2,200 > 2,000
10-32
10-33
Chairs
Selling price per unit
$80
Variable cost per unit
$30
Board feet per unit
2
Monthly demand
600
Tables
$400
$200
10
100
The company’s supplier of hardwood will only
be able to supply 2,000 board feet this month.
What plan would maximize profits?
a. 500 chairs and 100 tables
b. 600 chairs and 80 tables
c. 500 chairs and 80 tables
d. 600 chairs and 100 tables
10-33
10-34
Chairs
Selling price per unit
$80
Variable cost perSelling
unit price
$30
Board feet per unit
Variable cost2
Monthly demand
600
Tables
Chairs Tables
$400
$200$ 80 $ 400
10
30
200
100
Contribution margin $ 50 $ 200
Board feet
2
10
The company’s supplier of hardwood will only
CM per board foot
$ 25 $ 20
be able to supply 2,000 board feet this month.
What plan would maximize profits?
Production of chairs
600
a. 500 chairs and 100 tables
Board feet required
1,200
b. 600 chairs and 80 tables
Board feet remaining
800
c. 500 chairs and 80Board
tables
feet per table
10
d. 600 chairs and 100
tables of tables
Production
80
10-34
10-35
As before, Colonial Heritage’s supplier of
hardwood will only be able to supply 2,000
board feet this month. Assume the company
follows the plan we have proposed. Up to
how much should Colonial Heritage be
willing to pay above the usual price to obtain
more hardwood?
a. $40 per board foot
b. $25 per board foot
c. $20 per board foot
d. Zero
10-35
10-36
Asadditional
before, Colonial
Heritage’s
supplier
of
The
wood would
be used
to make
hardwood
ableboard
to supply
tables. Inwill
thisonly
use,be
each
foot 2,000
of
board feet
thiswill
month.
the company
additional
wood
allowAssume
the company
to earn
follows the plan we have proposed. Up to
an additional $20 of contribution margin and
how much should Colonial Heritage be
profit.
willing to pay above
the usual price to obtain
more hardwood?
a. $40 per board foot
b. $25 per board foot
c. $20 per board foot
d. Zero
10-36
10-37
When 2 or more products are produced from a
common input.
Split-off point is when the diffferent products are
separated.
10-37
10-38
Oil
Joint
Input
Common
Production
Process
Gasoline
Chemicals
Petroleum
refining industry,
a large number
of products are
extracted from
crude oil:
gasoline, jet fuel,
home heating oil,
lubricants,
asphalt, and
various organic
chemicals.
Split-Off
Point
10-38
10-39
Joint costs
Joint
Input
are incurred
up to the
split-off point
Oil
Common
Production
Process
Gasoline
Chemicals
Split-Off
Point
Separate
Processing
Final
Sale
Final
Sale
Separate
Processing
Separate
Product
Costs
Final
Sale
10-39
10-40
Joint costs are irrelevant
From the split-off point
they cannot be avoided.
Joint costs are common and should not be
included in making decisions
10-40
10-41
1.Sales value if processed further
minus
Sales value at the split-off
point.
2. Cost of further processing
beyond the split-off point.
3. (1) – (2). If positive then Process further
10-41
10-42
10-42
Chapter 10: Applying Excel
10-43
Data
Exhibit 10-6 Santa Maria Wool Cooperative
Cost of wool
$200 000
Cost of separation process
$40 000
Sales value of intermediate products at split-off point:
Undyed coarse wool
$120 000
Undyed fine wool
$150 000
Undyed superfine wool
$60 000
Costs of further processing (dyeing) intermediate products:
Undyed coarse wool
$50 000
Undyed fine wool
$60 000
Undyed superfine wool
$10 000
Sales value of end products:
Dyed coarse wool
$160 000
Dyed fine wool
$240 000
Dyed superfine wool
$90 000
Enter a formula into each of the cells marked with a ? below
Example: Joint Product Costs and the Contribution Approach
Analysis of the profitability of the overall operation:
Combined final sales value
Less costs of producing the end products:
Cost of wool
Cost of separation process
Combined costs of dyeing
Profit
$490 000
$200 000
40 000
120 000
360 000
$130 000
Analysis of sell or process further:
Final sales value after further processing
Less sales value at the split-off point
Incremental revenue from further processing
Less cost of further processing (dyeing)
Profit (loss) from further processing
Coarse
Fine
Superfine
Wool
Wool
Wool
$160 000 $240 000 $ 90 000
120 000
150 000
60 000
40 000
90 000
30 000
50 000
60 000
10 000
(10 000)
30 000
20 000
The company would be better off selling the undyed
coarse wool and processing further the fine and
superfine.
10-43