Accounting Decisions PERTEMUAN XII Dr Rilla Gantino, SE., AK., MM MM-FEB

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Accounting Decisions PERTEMUAN XII

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KEMAMPUAN AKHIR YANG DIHARAPKAN

Mahasiswa mengetahui tentang klasifkasi cost dan mengetahui tentang mengkalkulasi biaya produksi baik untuk jasa maupun produk. Mengetahui

tentang metode alokasi overhead serta konsep Contingency berkait dengan informasi yang

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Decisions

• _{A decision model is a formal method}

of making a choice, often involving both quantitative and qualitative

analyses

•

A

relevant cost

is a cost that

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Relevance

• _{Relevant Information has two}

characteristics:

– It occurs in the future

– It difers among the alternative courses of action

• _{Relevant Costs – expected future costs}

• _{Relevant Revenues – expected future}

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Identifying Relevant Costs

Costs that can be eliminated (in whole or in part) by choosing one alternative over

another are avoidable costs. Avoidable costs are relevant costs.

Unavoidable costs are never relevant and include:

Sunk costs.

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Identifying Relevant Costs

• _gather_all_{costs associated with}

the alternatives

• _{eliminate all sunk costs}

• _{Eliminate all future costs that}

don’t difer between alternatives

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Irrelevance

• _{Historical costs are past costs that}

are irrelevant to decision making

– _{Also called Sunk Costs- cost that has}

already been incurred and that cannot be avoided regardless of what a

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Types of Information

• _{Quantitative factors are outcomes}

that can be measured in numerical terms

• _{Qualitative factors are outcomes that}

are difcult to measure accurately in numerical terms, such as satisfaction

– _{Are just as important as quantitative}

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Terminology

• _{Incremental Cost – the additional}

total cost incurred for an activity

• Diferential Cost – the diference in total cost between two alternatives

• _{Incremental Revenue – the additional}

total revenue from an activity

• _{Diferential Revenue – the diference}

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Types of Decisions

• _{One-Time-Only Special Orders} • _{Insourcing vs. Outsourcing}

• _{Make or Buy} • _Product-Mix

• _{Customer Proftability}

• _{Branch / Segment: Adding or}

Discontinuing

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One-Time-Only Special

Orders

• _{Accepting or rejecting special orders}

when there is idle production capacity and the special orders have no

long-run implications

• _{Decision Rule: does the special order}

generate additional operating income?

– Yes – accept

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One-Time-Only Special

Orders

• _{Compares relevant revenues and}

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Special Orders

• Acki Company receives a one-time order that is not considered part of its normal ongoing business.

• Acki Company only produces one type of

silver key chain with a unit variable cost of TL 16. Normal selling price is TL 40 per unit.

• A company in KKTC ofers to purchase 3,000 units for TL 20 per unit.

• Annual capacity is 10,000 units, and annual fixed costs total TL7L8L,000, but Acki company is currently producing and selling only 5,000 units.

Should Acki accept the offer?

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Special Orders

If Acki accepts the ofer, net income will increase by TL 12.000.

Increase in revenue (3,000 × TL20) TL60.000 Increase in costs (3,000 × TL16 variable cost) 48.000 Increase in net income TL12.000

Using the incremental approach:

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Potential Problems with

Relevant-Cost Analysis

• _{Avoid incorrect general assumptions}

about information, especially:

– _{“All variable costs are relevant and all}

fxed costs are irrelevant”a

– _{There are notable exceptions for both}

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Potential Problems with

• _{Problems with using unit-cost data:}

– _{Including irrelevant costs in error}

– _{Using the same unit-cost with diferent}

output levels

• _{Fixed costs per unit change with diferent}

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Avoiding Potential Problems with

• _{Focus on Total Revenues and Total}

Costs, not their per-unit equivalents

• _{Continually evaluate data to ensure}

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Insourcing vs. Outsourcing

• _{Insourcing – producing goods or}

services within an organization

• Outsourcing – purchasing goods or services from outside vendors

• _{Also called the “Make or Buy”a}

decision

• _{Decision Rule: Select the option that}

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Qualitative Factors

• _{Nonquantitative factors may be}

extremely important in an evaluation process, yet do not show up directly in calculations:

– _{Quality Requirements}

– _{Reputation of Outsourcer} – _{Employee Morale}

– _{Logistical Considerations – distance from}

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Opportunity Costs

• Opportunity Cost is the contribution to operating income

that is forgone by not using a limited resource in its next-best alternative use

– “How much proft did the frm ‘lose out on’ by not selecting this alternative?”a

– _{The economic benefts that are foregone as a result of}

pursuing some course of action. Opportunity costs are not actual dollar outlays and are not recorded in the accounts of an organization.

• _{Special type of Opportunity Cost: Holding Cost for}

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The Make or Buy Decision

A decision concerning whether an item should be produced internally

or purchased from an outside

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The Make or Buy Decision

• _{MA Company is thinking of buying a part that is}

currently used in one of its products from outside.

• _{The unit cost to make this part is:}

TL/ u

Direct materials 27

Direct labor 15

Variable overhead 3

Depreciation of special equip. 9 Supervisor's salary 6 General factory overhead 30 Total cost per unit ₉₀

TL/ u Direct materials 27 Direct labor 15 Variable overhead 3

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The Make or Buy Decision

• General factory overhead is allocated on the basis of direct labor hours and is not going to change if the parts are bought from outside.

• The 90TL unit cost is based on 20,000 parts produced each year.

• An outside supplier has ofered to provide the 20,000 parts at a cost of 70TL per part.

Should we accept the supplier’s ofer?

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Cost Per

Unit Cost of 20,000 Units

Make Buy

Outside purchase price 70 1.400.000

Direct materials 27 540.000

Direct labor 15 300.000

Variable overhead 3 60.000 Depreciation of equip. 9 0 Supervisor's salary 6 120.000 General factory overhead 30 0

Total cost 90 1.020.000 1.400.000

The Make or Buy Decision

Not avoidable and is irrelevant. If the product is dropped, it will be reallocated to other products.

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The Make or Buy Decision

DECISION RULE

In deciding whether to accept the outside supplier’s ofer, MA isolated the relevant

costs of making the part by eliminating:eliminating

– The sunk costs.

– The future costs that will not difer between making or buying the parts.

DECISION RULE

In deciding whether to accept the outside supplier’s ofer, MA isolated the relevant

costs of making the part by eliminatingeliminating:

– The sunk costs.

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Product-Mix Decisions

• _{The decisions made by a company}

about which products to sell and in what quantities

• _{Decision Rule (with a constraint):}

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Utilization of a Constrained Resource

• _{Firms often face the problem of}

deciding how to best utilize a constrained resource.

• _{Usually, fxed costs are not afected}

by this particular decision, so management can focus on

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Utilization of a Constrained Resource

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• _{Machine A1 is the constrained resource.}

There is excess capacity on all other

machines. Machine A1 is being used at

100% of its capacity, and has a capacity of 2,400 minutes per week.

Should UM focus its eforts on

Product 1 or 2?

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Let’s calculate the contribution margin per unit of the constrained resource, machine A1.

Product 2 should be emphasized. Provides more valuable use of the constrained resource machine A1,

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Utilization of a Constrained

Resource

Let’s calculate the contribution margin per unit of the scarce resource, machine A1.

Let’s see how this plan would work.

If there are no other considerations, the best plan would be to produce to meet current demand for Product 2 and then

use remaining capacity to make Product 1.

If there are no other considerations, the best plan would be to produce to meet current demand for Product 2 and then

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Utilization of a Constrained Resource

Let’s see how this plan would work.

Allocation of Constrained Resource

Weekly demand for Product 2 2.200 units Time required per unit × 0,50 min. Total time required to make

Product 2 1.100 min.

Total time available 2.400 min. Time used to make Product 2 1.100 min. Time available for Product 1 1.300 min. Time required per unit ÷ 1,00 min. Production of Product 1 1.300 units Allocation of Constrained Resource

Weekly demand for Product 2 2.200 units Time required per unit × 0,50 min. Total time required to make

Product 2 1.100 min.

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Utilization of a Constrained Resource

According to the plan, we will produce 2,200 units of

Product 2 and 1,300 of Product 1. Our

contribution margin looks like this.

Product 1 Product 2 Production and sales (units) 1.300 2.200 Contribution margin per unit TL24 TL15 Total contribution margin TL31.200 TL33.000

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Managing Constraints

Finding ways to process more units through a

resource bottleneck

Produce only

what can be sold.

Streamline production process.

Eliminate waste.

At the bottleneck itself: •Improve the process

• Add overtime or another shift • Hire new workers or acquired more machines

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Adding or Dropping

Customers

• _{Decision Rule: Does adding or}

dropping a customer add operating income to the frm?

– _{Yes – add or don’t drop} – _{No – drop or don’t add}

• _{Decision is based on proftability of}

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Adding or Discontinuing

Branches or Segments

• _{Decision Rule: Does adding or}

discontinuing a branch or segment add operating income to the frm?

– Yes – add or don’t discontinue

– No – discontinue or don’t add

• _{Decision is based on proftability of}

the branch or segment, not how much revenue the branch or segment

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Sales 1.000.000 Less: variable expenses

Variable mfg. costs 240.000 Variable shipping costs 10.000

Commissions 150.000 400.000 Contribution margin 600.000 Less: fixed expenses

General factory overhead 120.000 Salary of line manager 180.000 Depreciation of equipment 100.000 Advertising - direct 200.000 Rent - factory space 140.000

General admin. expenses 60.000 800.000

Net loss (200.000)

Income Statement for 2007 Digital Musical Instruments

Adding/Dropping Segments

General Factory Overhead and General Administrative Expenses are unavoidable costs.

Assume that the equipment used in manufacturing digital instruments has no resale value or alternative use.

Should the company drop digital instruments division?

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Incremental Approach

DECISION RULE

UM should drop the digital instruments division only if the avoided fxed

costs of the division exceed lost contribution margin of this division.

DECISION RULE

UM should drop the digital instruments division only if the avoided fxed

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Incremental Approach

Contribution Margin Solution

Contribution margin lost if digital

instrument division is dropped (600.000)

Less fixed costs that can be avoided

Salary of the line manager 180.000

Advertising - direct 200.000

Rent - factory space 140.000 520.000

Net disadvantage (80.000)

What about depreciation?

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Comparative Income

Approach

Prepare comparative income

statements showing results with and without the digital instruments

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Comparative Income Approach Solution

Ke e p Digital Ins trum e nts

Drop Digital

Ins trum e nts Difference

Sales 1.000.000 0 (1.000.000)

Less variable expenses: 0

Mfg. expenses 240.000 0 240.000

Freight out 10.000 0 10.000

Commissions 150.000 0 150.000

Total variable expenses 400.000 0 400.000

Contribution margin 600.000 0 (600.000)

Less fixed expenses:

General factory overhead 120.000 120.000 0

Salary of line manager 180.000 0 90.000

Depreciation 100.000 100.000 0

Advertising - direct 200.000 0 100.000

Rent - factory space 140.000 0 70.000

General admin. expenses 60.000 60.000 0

Total fixed expenses 800.000 280.000 260.000

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Joint Product Costs

• _{In some industries, a number of end}

products are produced from a single raw material input.

• _{Two or more products produced from a}

common input are called joint productsjoint products. • _{The point in the manufacturing process}

where each joint product can be

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Joint Products

Joint Input

Common Production

Process

Split-Off

Split-Off

Point

Joint

Costs

Costs Oil

Gasoline

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The Pitfalls of Allocation of Joint

Costs

• _{Joint costs are really common costs}

incurred to simultaneously produce a variety of end products.

• _{Joint costs are often allocated to end}

products on the basis of the relative relative sales value