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

  

Accounting Decisions

PERTEMUAN XII

Dr Rilla Gantino, SE., AK., MM

MM-FEB

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 dibutuhkan management dalam menghadapi ketidakpastian

  

Decisions

• A decision model is a formal method of making a choice, often involving both quantitative and qualitative anal
• A relevant cost is a cost that difers between alternatives.

Five-Step Decision-Making Process

  Step 1: Obtain Information

  Step 5: Evaluate Performance Step 4:

  Implement The Decision

Step 3:

  

Choose

An

Alternative

Step 2:

  Make Predictions About Future

  Costs

Feedback

  

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 revenues

  

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.  Future costs that do not difer between the alternatives.

  

Identifying Relevant Costs

• gather all costs associated with

  the alternatives

• eliminate all sunk costs
• Eliminate all future costs that

  don’t difer between alternatives

• left are the avoidable costs

  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 manager decides to do

  

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 factors even though they are difcult to

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 in total revenue between two

Types of Decisions

• One-Time-Only Special Orders • Insourcing vs. Outsourcing • Make or Buy • Product-Mix
• Customer Proftability • Branch / Segment: Adding or Discontinuing

  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
• – No – reject

  One-Time-Only Special Orders

• Compares relevant revenues and relevant costs to determine proftability

  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.

  Special Orders

  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:

Special order contribution margin = TL20 – TL 16 = TL 4

Change in income = TL 4 × 3,000 units = TL 12.000.

  

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

  costs

  Potential Problems with Relevant-Cost Analysis

• 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 levels of output

Avoiding Potential Problems with Relevant-Cost Analysis

• Focus on Total Revenues and Total Costs, not their per-unit equivalents
• Continually evaluate data to ensure that they meet the requirements of relevant information

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 will provide the frm with the lowest

  

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

  

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

  Inventory. Funds tied up in inventory are not available

  for investment elsewhere

The Make or Buy Decision

  A decision concerning whether an item should be produced internally or purchased from an outside supplier is called a “make or buy”a decision.

  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 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 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?

Should we accept the supplier’s ofer? The Make or Buy Decision

Cost

Per

  Sunk Cost

Unit

  Cost of 20,000 Units Buy Make 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 Supervisor's salary 6 120.000 General factory overhead

  90 1.020.000 1.400.000 The Make or Buy Decision

DECISION RULE

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.

  

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.
• – The future costs that will not difer

  between making or buying the parts.

Product-Mix Decisions

• The decisions made by a company about which products to sell and in what quantities
• Decision Rule (with a constraint): choose the product that produces the highest contribution margin per unit of the constraining resource

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 maximizing total contribution margin.

  

Utilization of a Constrained Resource

UM Company produces two products and selected data is shown below:

  Utilization of a Constrained Resource • 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

Should UM focus its eforts on

  Product 1 or 2? Product 1 or 2? Utilization of a Constrained Resource

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,

yielding a contribution margin of TL 30 per minute as

  

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.

  

Let’s see how this plan would work.

  If there are no other considerations, the best plan would be If there are no other considerations, the best plan would be to produce to meet current demand for Product 2 and then to produce to meet current demand for Product 2 and then Utilization of a Constrained Resource Let’s see how this plan would work.

  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. 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 Utilization of a Constrained Resource

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

  

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

Product 2 and 1,300 of Product 1. Our

  Product 2 and 1,300 of Product 1. Our contribution margin looks like this. 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

  

Managing Constraints

Produce only Finding ways to what can be sold. process more units through a At the bottleneck itself: resource •Improve the process bottleneck • Add overtime or another shift • Hire new workers or acquired more machines • Subcontract production Eliminate waste.

  

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 the customer, not how much revenue a customer generates

  

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

  

Adding/Dropping Segments

Digital Musical Instruments

  Income Statement for 2007 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 Should the company drop digital instruments Rent - factory space 140.000 Should the company drop digital instruments

General admin. expenses division? 60.000 800.000

division? Net loss

  (200.000) General Factory Overhead and General Administrative Expenses are unavoidable costs.

  

Incremental Approach

DECISION RULE DECISION RULE DECISION RULE DECISION RULE

  

UM should drop the digital instruments

UM should drop the digital instruments

division only if the avoided fxed division only if the avoided fxed costs of the division exceed lost costs of the division exceed lost contribution margin of this division. contribution margin of this division.

  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? What about depreciation?

Comparative Income Approach

  Prepare comparative income statements showing results with and without the digital instruments division.

  

Comparative Income Approach

Solution

Ke e p Digital Drop Digital Ins trum e nts Ins trum e nts Difference Sales

  1.000.000 (1.000.000) Less variable expenses:

Mfg. expenses 240.000 240.000

Freight out 10.000 10.000

Commissions 150.000 150.000

Total variable expenses 400.000 400.000

Contribution margin 600.000 (600.000)

Less fixed expenses: General factory overhead 120.000 120.000

Salary of line manager 180.000 90.000

Depreciation 100.000 100.000

Advertising - direct 200.000 100.000

Rent - factory space 140.000 70.000

General admin. expenses 60.000 60.000

Total fixed expenses 800.000 280.000 260.000

Net loss

  (200.000) (280.000) (340.000)

  

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 joint products.

  

common input are called joint products

• The point in the manufacturing process where each joint product can be recognized as a separate product is split-of point.

  called the split-of point

  Joint Products

Joint Joint

  Oil

Costs Costs

  Common Joint Gasoline Production

  Input Process Chemicals

  

Split-Off

Split-Off Joint Products

Joint Joint

  Final Separate Costs Oil

Costs

  Sale Processing Common Joint

  Final Gasoline Production Input

  Sale Process Separate Final

  Chemicals Processing Sale

  Separate Separate Split-Off Split-Off

  

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 of each product or on sales value some other basis.