10 Questions
What is the paramount consideration in deciding whether to accept or reject a special order?
Incremental profit
If regular sales are lost due to accepting a special order, what should be deducted from the incremental profit?
Lost contribution margin
What is the difference between incremental sales and incremental costs and expenses termed as?
Incremental profit (loss)
What is the primary concern when deciding whether to continue or shutdown a business segment?
Incremental cost
What should be compared with the incremental profit from special sales orders to determine the net advantage or disadvantage?
Alternative use of capacity benefit
If there is no alternative use of the capacity, what constitutes the incremental profit (loss) from a special sales order?
Difference between incremental sales and incremental costs and expenses
What is the main effect on a company's profitability when buying a component from a third party instead of producing it?
Decreased unit cost
What is the best comparison to determine whether to continue producing a component or buy it externally?
Unit cost versus sales price
What is the crucial factor when deciding between making a component in-house or buying it externally?
Cost savings
What should be considered when deciding whether to accept a special order?
Incremental profit potential
Study Notes
Production and Costing
- Split-off point: the stage where joint products are separated into distinct products.
- Further processing costs: costs incurred in processing separate products beyond the split-off point.
Bottleneck Resources
- Any operation where capacity is less than demand placed upon it.
- Can affect production and decision-making.
Make or Buy Decisions
- Involve deciding whether to produce a part internally or outsource it from a supplier.
- Factors to consider: lack of technology, man labor hours, machine hours, systems expertise, and financing.
- Unprofitable operations and savings can also influence the decision.
- The option with the lower relevant cost is typically the better alternative.
- Relevant costs to consider: differential, incremental, opportunity, and out-of-pocket costs.
Short-Term Non-Routine Decisions
- Types of decisions: make or buy, accept or reject special orders, continue or shut down a business segment.
- Decision-making guidelines:
- Make or buy: choose the option with the lower cost, considering opportunity costs.
- Accept or reject special orders: accept if additional revenue exceeds additional cost.
- Continue or shut down: continue if avoidable revenue is greater than avoidable costs.
Sample Problems
- HYBE Corporation: deciding whether to make or buy an engine component.
- Making: costs P 3,000 per unit, but can rent out facility for P 9,000.
- Buying: costs P 2,500 per unit.
- Conclusion: buying is the better alternative.
- JK Corporation: deciding whether to accept a special order.
- Consider incremental profit, lost contribution margin, and alternative use of capacity.
- Compare incremental profit with the best benefit from alternative use of capacity to determine net advantage or disadvantage.
Test your knowledge on cost accounting concepts such as split-off point, further processing costs, bottleneck resources, and make or buy decisions. Challenge yourself with questions related to joint products, processing costs, resource constraints, and outsourcing decisions.
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