Lecture Fundamentals of cost accounting (4th edition): Chapter 4 - Lanen, Anderson, Maher

(BQ) Chapter 4: Fundamentals of cost analysis for decision making. Now that you are comfortable with CVP analysis and the impact of fixed versus variable costs, we can extend the concepts and apply the theories to a multitude of business conditions.
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Lecture Fundamentals of cost accounting (4th edition): Chapter 4 - Lanen, Anderson, Maher© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in anymanner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. FundamentalsofCostAnalysisfor DecisionMaking Chapter4 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., CPAMcGrawHill/Irwin Copyright©2014byTheMcGrawHillCompanies,Inc.Allrightsreserved.LearningObjectives LO 4-1 Use differential analysis to analyze decisions. LO 4-2 Understand how to apply differential analysis to pricing decisions. LO 4-3 Understand several approaches for establishing prices based on costs for long-run pricing decisions. LO 4-4 Understand how to apply differential analysis to production decisions. LO 4-5 Understand the theory of constraints. 43LO4-1 DifferentialAnalysis LO 4-1 Usedifferentialanalysistoanalyzedecisions. Differential Analysis The process of estimating revenues and costs of alternative actions available to decision makers and of comparing these estimates to the status quo Short Run The period of time over which capacity will be unchanged, usually one year 44LO4-1 DifferentialCosts With two or more alternatives, costs that differ among or between alternatives Costs that change in response to an alternative course of action Differential costs differ between actions. Alternative A Alternative B 45LO4-1 SunkCosts Costs incurred in the past that cannot be changed by present or future decisions A sunk cost is NOT relevant for making decisions. 46LO4-1 DifferentialCostsversusTotalCosts Information presented to management can show the detailed costs that are included for making a decision, or it can show just the differences between alternatives, as follows. Status Quo Alternative Difference Sales revenue $750 $900 $150 Variable costs (250) (300) (50) Contribution margin $500 $600 $100 Fixed costs (350) (350) -0- Operating profit $150 $250 $100 47 DifferentialAnalysisandLO4-2 PricingDecisions LO 4-2 Understand how to apply differential analysis to pricing decisions. Variable costs must always be covered. Fixed costs must be covered in the long run. 48 ShortRunversusLongRunLO4-2 PricingDecisions Year 0 Year 1 Short-run Long-run pricing decision: pricing decision: Less than one year Longer than one year Pricing a one-time Pricing a new product. special order. 49 ShortRunPricingDecisions:LO4-2 SpecialOrders An order that will not affect other sales and is usually a one-time occurrence 410 ShortRunPricingDecisions:LO4-2 SpecialOrders • U-Develop has received a one-time offer for 500 prints at a special price of 40¢ per print ($200). • The regular price is 50¢ and they have enough idle capacity in the week to take the offer. Sales for the week (5,000 prints at 50¢) $2,500 Variable costs, including paper, maintenance, ...