Podcast
Questions and Answers
What is the first step in a decision model?
What is the first step in a decision model?
Which term refers to costs that can be eliminated when choosing one alternative over another?
Which term refers to costs that can be eliminated when choosing one alternative over another?
Which of the following is considered irrelevant in decision-making?
Which of the following is considered irrelevant in decision-making?
What kind of information should be gathered for effective decision-making?
What kind of information should be gathered for effective decision-making?
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Which of the following best describes opportunity cost?
Which of the following best describes opportunity cost?
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What is the net advantage of making the seat cushions?
What is the net advantage of making the seat cushions?
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Which costs are considered irrelevant in the total cost calculation?
Which costs are considered irrelevant in the total cost calculation?
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How much is the relevant manufacturing cost per unit for the seat cushions?
How much is the relevant manufacturing cost per unit for the seat cushions?
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What is the regular selling price per unit for Grace Company's Product G?
What is the regular selling price per unit for Grace Company's Product G?
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What factor should be considered when evaluating a special order?
What factor should be considered when evaluating a special order?
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If Grace Company accepts the special order with a 30% discount, which cost does not change?
If Grace Company accepts the special order with a 30% discount, which cost does not change?
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Based on the cost structure provided, what is the total unit cost for Grace Company's Product G?
Based on the cost structure provided, what is the total unit cost for Grace Company's Product G?
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What is the special selling price per unit for the order?
What is the special selling price per unit for the order?
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What is the total loss incurred by Grace Company for accepting the special order?
What is the total loss incurred by Grace Company for accepting the special order?
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Which of the following costs are considered irrelevant in the special order decision?
Which of the following costs are considered irrelevant in the special order decision?
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What is the incremental profit from accepting the special order?
What is the incremental profit from accepting the special order?
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In making decisions to continue or discontinue a business segment, what should be compared?
In making decisions to continue or discontinue a business segment, what should be compared?
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What direct costs are included in the relevant cost analysis for the special order?
What direct costs are included in the relevant cost analysis for the special order?
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How many units does Grace Company have in idle capacity?
How many units does Grace Company have in idle capacity?
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What cost results from variable overhead per unit in the special order?
What cost results from variable overhead per unit in the special order?
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What decision should a company make if a product’s revenue exceeds its own costs?
What decision should a company make if a product’s revenue exceeds its own costs?
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What is the loss Mr. Villiones would incur if he continues operating the snack counter?
What is the loss Mr. Villiones would incur if he continues operating the snack counter?
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What is the total amount of shut down costs for Mr. Villiones if he decides to shut down operations?
What is the total amount of shut down costs for Mr. Villiones if he decides to shut down operations?
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If Mr. Villiones shuts down his operations, which loss amount does he incur?
If Mr. Villiones shuts down his operations, which loss amount does he incur?
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Which of the following factors does not contribute to the total shut down costs?
Which of the following factors does not contribute to the total shut down costs?
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What should be compared in decision-making to determine whether to process a product further or sell it as is?
What should be compared in decision-making to determine whether to process a product further or sell it as is?
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What indicates that Mr. Villiones should continue his operations despite the reduced sales volume?
What indicates that Mr. Villiones should continue his operations despite the reduced sales volume?
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Which of the following would lead a company to process a product further?
Which of the following would lead a company to process a product further?
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What is the contribution margin per unit for Mr. Villiones' snack counter?
What is the contribution margin per unit for Mr. Villiones' snack counter?
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If Mr. Villiones decides to continue his operations, what is his total contribution margin for the month?
If Mr. Villiones decides to continue his operations, what is his total contribution margin for the month?
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Study Notes
Strategic Cost Management
- Focuses on using cost information for decision-making.
- Involves concepts and techniques for making better business decisions.
- Presents different business decisions.
Decision Making and Decision Models
- Decision-making is the process of selecting future courses of action.
- Decision models are formal methods for making choices, incorporating quantitative and qualitative analyses.
Basic Steps in a Decision Model
- A. Identify the Problem: Common questions include accepting/rejecting special orders; making or buying parts/products; selling or further processing products; continuing or closing business segments; choosing the best product mix; adjusting profit factors for desired profit goals; setting prices for products/services.
- B. Obtain Information and Make Predictions: Gathering relevant data, including qualitative and quantitative factors, essential for decision-making. Includes focusing on relevant costs and revenues that differ across alternative actions, and ignoring sunk costs (past costs).
- C. Identify and Evaluate Alternative Courses of Action: Consider only relevant factors in evaluating options. Choose the best alternative based on highest potential profit (or lowest loss).
- D. Implement the Decision: Putting the best course of action into practice.
- E. Evaluate the Performance of the Decision: Assessing outcomes to provide feedback for improving future decisions.
Decision Involving Alternative Choices: Make or Buy
- Make or buy decisions involve deciding whether to produce an item internally or purchase it from external suppliers and focus on tangible products.
- The decision considers relevant costs (variable and differential costs).
- Irrelevant costs (such as sunk costs and fixed costs not changing across alternatives) are excluded from the analysis.
- The decision considers the purchase price and the variable manufacturing cost and comparing both alternatives to determine which method is the more economical choice for the company.
Decision Involving Alternative Choices: Accept or Reject a Special Order
- Special orders often involve a larger volume or discounted prices compared to regular orders.
- Special orders should be evaluated considering the cost impact, availability of production capacity, and company objectives.
- Relevant costs for special orders include those that differ based on accepting or rejecting the order. Fixed costs are often considered irrelevant, as they likely don't change.
Decision Involving Alternative Choices: Continue or Discontinue Operating a Business Segment
- Deciding whether to continue or discontinue a product line or profit center.
- The decision maker needs to compare the revenue of the segment with its direct avoidable costs. Fixed costs that remain the same, regardless of the decision, are considered irrelevant.
- Continuing a product line is appropriate if its revenue exceeds its variable and direct fixed costs.
Decision Involving Alternative Choices: Temporary Shut Down
- This involves temporarily stopping operations due to external factors.
- Costs incurred even during a temporary shutdown (like security, maintenance) are considered irrelevant to the decision of whether to remain open or close temporarily. Only variable costs can potentially change.
- The company should continue if the potential loss from continuing operations is less than the loss from temporary shutdown.
Decision Involving Alternative Choices: Sell or Process Further
- Evaluating if a product should be further processed or sold at its current stage of processing.
- Compare differential revenue (from further processing) with differential costs (of further processing).
- Sunk costs are not relevant; only additional costs and revenues are considered.
Decision Involving Alternative Choices: Joint Products
- Companies producing multiple linked products that are processed simultaneously.
- The manufacturing cost is a joint cost.
- At the split-off point (where individual products emerge), costs are allocated using various methods.
- The decision of further processing comes down to weighing the selling price (at split-off) against the additional income generating ability of further processing (and processing cost).
Decision Involving Alternative Choices: Product Combination/Utilization of Scarce Resources
- Determining the optimum combination of products given constraints like limited resources (like labor hours, machine hours).
- Determine the contribution margin per unit and per scarce resource (e.g., machine hour).
- Optimal production should prioritize products with the highest contribution margin per scarce resource.
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