chapter09_decision making & relevant invformation.ppt

8/9/2019 Chapter09_Decision Making & Relevant Invformation.ppt

1/41

Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008

Decision Making with RelevantCosts an a !trategic "mphasis

Chapter Nine


2/41

2


• Define the decision-making process and identify thetypes of cost information relevant for decision making

• Use relevant and strategic cost analysis to makespecial-order decisions

• Use relevant and strategic cost analysis in the make-lease-or-buy decision

• Use relevant and strategic cost analysis in the decisionto sell before or after additional processing

Learning Objectives


3/41


• Use relevant and strategic cost analysis in the decisionto keep or drop products or services

• Use relevant and strategic cost analysis to evaluateprograms

• !naly"e decisions #ith multiple products and limitedresources $so-called %product-mi&' decisions(

• Discuss behavioral, implementation, and legal issues indecision making

Learning Objectives (continued)


4/41

)


The Decision-Making Process

Third: *elevant Cost !nalysisand Strategic Cost !nalysis

econd: Specify the Criteriaand +dentify the

!lternative !ctions

econd: Specify the Criteriaand +dentify the

!lternative !ctions

!irst: Determine theStrategic +ssues

!irst: Determine theStrategic +ssues

!ourth: Select and+mplement a

Course of !ction

!ourth: Select and

+mplement aCourse of !ction

!i"th: valuateerformance

!i"th: valuateerformance

+dentify and Collect*elevant +nformation

+dentify and Collect*elevant +nformation

redict .uture /alues of *elevant Costs 0 *evenues

redict .uture /alues of *elevant Costs 0 *evenues

Consider Strategic +ssues

Consider Strategic +ssues


5/41


6/41

3


*uip&ent-'ep$ace&entDecision +a&p$e

• Origina$ cost o" o$d &achine, .,/00• Current book va$ue o" o$d &achine, /,100• Purchase price o" a ne% &achine, 2,000• Ne% &achine %i$$ have 3ero sa$vage va$ue• 'epairs to o$d &achine %ou$d be 4,500 and %ou$d

a$$o% one &ore ear o" productivit• Po%er "or either &achine is e+pected to be

/6507hour • Ne% &achine %i$$ reduce $abor costs b 06507hour • +pected $eve$ o" output "or ne+t ear is /,000 units

• Origina$ cost o" o$d &achine, .,/00• Current book va$ue o" o$d &achine, /,100• Purchase price o" a ne% &achine, 2,000• Ne% &achine %i$$ have 3ero sa$vage va$ue• 'epairs to o$d &achine %ou$d be 4,500 and %ou$d

a$$o% one &ore ear o" productivit

• Po%er "or either &achine is e+pected to be/6507hour • Ne% &achine %i$$ reduce $abor costs b 06507hour • +pected $eve$ o" output "or ne+t ear is /,000 units

8hich costs are not re$evant to the decision to keep an o$d&achine or rep$ace it %ith a ne%, &ore e""icient one9

8hich costs are not re$evant to the decision to keep an o$d&achine or rep$ace it %ith a ne%, &ore e""icient one9


7/41

4


*uip&ent 'ep$ace&entDecision (continued)

• Origina$ cost o" o$d &achine, .,/00• Current book va$ue o" o$d &achine, /,100•

Purchase price o" a ne% &achine, 2,000• Ne% &achine %i$$ have 3ero sa$vage va$ue• 'epairs to o$d &achine %ou$d be 4,500 and

%ou$d a$$o% one &ore ear o" productivit

• Po%er "or either &achine is e+pected to be/6507hour • Ne% &achine %i$$ reduce $abor costs b

06507hour

• Origina$ cost o" o$d &achine, .,/00• Current book va$ue o" o$d &achine, /,100•

Purchase price o" a ne% &achine, 2,000• Ne% &achine %i$$ have 3ero sa$vage va$ue• 'epairs to o$d &achine %ou$d be 4,500 and

%ou$d a$$o% one &ore ear o" productivit

• Po%er "or either &achine is e+pected to be/6507hour • Ne% &achine %i$$ reduce $abor costs b

06507hour

The re$evant costs are6666 The re$evant costs are6666


8/41

5


'e$evant Cost #na$ sis:#dditiona$ Considerations

• atch-$eve$ cost drivers shou$d be considered inre$evant cost ana$ sis

.or e&ample, if setup on one machine takes longer andre6uires more skilled labor than the other machine,these factors should be included in the analysis

• Opportunity costs , the bene"it $ost %hen onechosen option prec$udes the bene"its "ro& ana$ternative option, shou$d a$so be considered inthe ana$ sis o" a$ternative options

.or e&ample, addition of a ne# product could causereduction, delay, or lost sales in other product areas


9/41

7


'e$evant Cost #na$ sis: #dditiona$Considerations (continued)

• Depreciation is not inc$uded in re$evant costana$ sis except when considering tax implications

• Ti&e-va$ue o" &one is re$evant %hen decidinga&ong a$ternatives %ith cash "$o%s over t%o or&ore ears

• ;&portance o" *ua$itative "actors:

Differences in 6uality .unctionality 8imeliness of delivery *eliability in shipping !fter-sale service level


10/41

9:


trategic in"or&ation keeps the decision &aker


11/41

99


'e$evant Cost #na$ sis vs6trategic Cost #na$ sis


12/41

92


'e$evant and trategic Cost #na$ sisin Decision Making

This decision "ra&e%ork can be used to addressco&&on &anage&ent decisions such as:

8he special-order decision 8he make-lease-or-buy decision 8he decision to sell before or after additional

processing 8he short-term product-mi& decision rofitability analysis $e


13/41

9


• ! special-order decision occurs #hen a firm has aone-time opportunity to sell a specified 6uantity of itsproduct or service= these orders are generally non-

recurring• 8he first step in the decision process is to considerthe relevant costs $an e&ample follo#s(>

+a&p$e: the pecia$-OrderDecision

TT , ;nc6 nor&a$$ charges =600 per T-shirt, but#$pha eta >a&&a has o""ered to pa ?650 "or

1,000 T-shirts6 8hat are the re$evant costs indeter&ining i" the o""er shou$d be accepted9

TT , ;nc6 nor&a$$ charges =600 per T-shirt, but#$pha eta >a&&a has o""ered to pa ?650 "or

1,000 T-shirts6 8hat are the re$evant costs indeter&ining i" the o""er shou$d be accepted9


14/41


15/41

91


The pecia$-Order Decision (continued)

8he costs that arenot relevant total?)1:,:::

8otal Cost @ ?1


16/41

93



#na$ sis o" the net contribution $ooks "avorab$e

+f 88S has e&cess capacity, the offer should beaccepted because it #ill add ?9,21: to pre-ta&income $9,::: 8-shirts ?9


17/41

94


@T666to &ake an in"or&ed decision, TT &ust a$soconsider the strategic "actors in this decision

+s 88S producing at or near full capacity• +n this case, the ans#er is no• +f 88S #ere producing at or near capacity, it #ould have to

consider opportunity costs +s this order really a one-time special order

• Special-order decisions are meant for infre6uent situations,and if done on a regular basis, can erode profitability

8he credit history of the buyer, any potential comple&ities inthe design that might cause problems

Eo# might the special-order price affect the long-term pricestructure of the firm



18/41

95


Decision conte+t: %hich parts to &ake interna$$ and%hich parts to purchase "ro& an outside supp$ier9

8he relevant cost analysis proceeds much like that ofa special-order decision $an e&ample follo#s(>

+a&p$e: Make-or- u Decision

Blue 8one is currently manufacturing themouthpiece for its clarinet, but has the option to buythis item from a supplier< Short-term fi&ed overhead

costs #ill not change #hether or not Blue 8onechooses to make or to buy the mouthpiece<

Blue 8one is currently manufacturing themouthpiece for its clarinet, but has the option to buythis item from a supplier< Short-term fi&ed overhead

costs #ill not change #hether or not Blue 8onechooses to make or to buy the mouthpiece<

97


19/41

97


Make-or- u +a&p$e (continued)

8he relevant cost analysis indicates that manufacturing the part ismore cost effective, but Blue 8one must also consider strategicfactors, such as the 6uality of the part, reliability of the supplier,and potential alternative uses of plant capacity, before making a

final decision<

2


20/41

2:


Let


21/41

29


Lease-or- u+a&p$e (continued)

Lease Purchase#nnua$ $ease .0,000 N7#Charge per cop 060/ N7#Purchase cost N7# 1?0,000#nnua$ service contract N7# /0,000 Aa$ue at end o" period N7# .0,000

+pected nu&ber o" copies per ear ?,000,000 ?,000,000

Buick Cop( Lease or :u( ;n"or&ation

The "irst step in this ana$ sis is to use CAPana$ sis to ca$cu$ate the indi""erence point 6 6 6

22


22/41

22


Lease-or- u+a&p$e (continued)

Gease cost @ urchase cost

Annual fee = Net purchase cost + Service contract $40,000 + ($0.02 × Q) = ($ !0,000 " $40,000) + $20,000 Q = $ 00,000 # $0.02

= ,000,000 copies

Annual fee = Net purchase cost + Service contract $40,000 + ($0.02 × Q) = ($ !0,000 " $40,000) + $20,000 Q = $ 00,000 # $0.02

= ,000,000 copies

8he indifference point, 1,:::,::: copies, is lo#er than thee&pected annual machine usage of 3,:::,::: copies< So, FuickCopy should purchase the machine if strategic factors, such as6uality of the copy, reliability of the machine, and benefits and

features of the service contract, are favorable

8he indifference point, 1,:::,::: copies, is lo#er than thee&pected annual machine usage of 3,:::,::: copies< So, FuickCopy should purchase the machine if strategic factors, such as6uality of the copy, reliability of the machine, and benefits and

features of the service contract, are favorable

2


23/41

2


Lease-or- u +a&p$e (continued)

1.0,000

.0,000

Nu&ber o" Copies per ear

C o s t Cost to Lease Copier

Net cost to Purchase Copier

B 5,000,000

2)


24/41

2)


Decision: %hether to se$$ a product or service be"orean inter&ediate processing step or to add "urtherprocessing and then se$$ the product or service "or ahigher price9

e$$-or-Process !urther +a&p$e

88S has suffered an e6uipment malfunction causing):: 8-shirts not to be acceptable< 8he shirts can besold as-is for ?)


25/41

21


e$$-or-Process !urther +a&p$e(continued)

8he net advantage to reprinting the 8-shirts is ?55: $?2,35: -?9,5::(< 88S #ould need to consider the effect of selling to discount

stores #ere the cost analysis in favor of that option<

8he net advantage to reprinting the 8-shirts is ?55: $?2,35: -?9,5::(< 88S #ould need to consider the effect of selling to discount

stores #ere the cost analysis in favor of that option<

23


26/41

23


Pro"itabi$it ana$ sis addresses issues such as: Hhich product lines are most profitable !re the products priced properly Hhich products should be promoted and advertised more

aggressively Hhich product-line managers should be re#arded

#n e+a&p$e "o$$o%s:

Pro"itabi$it #na$ sis

Hindbreakers, +nc< manufactures three Iackets<

Janagement is concerned about the lo# profitability of the%Kale' Iacket and is thinking about dropping the product< +fthe Iacket is dropped, there #ill be no change in total fi&edcosts for the coming year<

Hindbreakers, +nc< manufactures three Iackets<

Janagement is concerned about the lo# profitability of the%Kale' Iacket and is thinking about dropping the product< +fthe Iacket is dropped, there #ill be no change in total fi&edcosts for the coming year<

24


27/41

24


Pro"itabi$it #na$ sis (continued)

25


28/41

25


Pro"itabi$it #na$ sis

(continued)8he company is ?91,::: $?9)4,::: -?9 2,:::( better off retaining rather

than deleting the %Kale' Iacket<Hindbreakers, +nc< should alsoconsider strategic factors in this

decision, such as #hether dropping oneproduct line #ould affect sales of

another and #hether employee morale#ould be affected by the decision<

8he company is ?91,::: $?9)4,::: -?9 2,:::( better off retaining rather

than deleting the %Kale' Iacket<Hindbreakers, +nc< should alsoconsider strategic factors in this

decision, such as #hether dropping oneproduct line #ould affect sales of

another and #hether employee morale#ould be affected by the decision<

27


29/41

27


Pro"itabi$it #na$ sis in ervice andNot-"or-Pro"it (N!P) Organi3ations

'e$evant cost ana$ sis is o"ten used b service andN!P "ir&s to deter&ine the desirabi$it o" ne%services : e+a&p$e, Triang$e 8o&en


30/41

:


Eo% to &ake best use out o" e+isting resources9 Thatis, ho% to choose the best short-ter& product &i+9

Continuing %ith the 8indbreaker


31/41

9


hort-Ter& Product Mi+ Decision:One Production Constraint

8he goal is to ma&imi"e contribution margin, subIect tothe production resource constraint< .or this, #e need todetermine each product;s contribution margin per unit ofthe scare resource>

2


32/41

2


hort-ter& Product Mi+ Decision:One Production Constraint

@nits o"a$es

"or >a$e

@nits o" a$es"or 8ind

4?,000

/ .

, 0 0 0

2 2

Production constraint "or

se%ing &achine6 #$$possib$e sa$es &i+es arerepresented on this $ine6

$ope -4?,000 F /.,000 -47/;ntercept 4?,000

$ope -4?,000 F /.,000 -47/;ntercept 4?,000


33/41


hort-ter& Product-Mi+ Decision:One Production Constraint

Production o" 8ind is "avored over production o" >a$e( 1=/,000 - 1..,000)6 8hen there is one constraint, one o"the products %i$$ be "avored over the others6

)


34/41

)


+n the presence of t#o or more production constraints,determining the best sales mi& becomes morecomplicated, but the principle is the same<

Continuing #ith the Hindbreaker;s +nc< e&ample assume>

hort-ter& Product-Mi+ Decision:T%o Production Constraints

8he completed Iackets are inspected and labels are addedbefore packaging< .orty #orkers are re6uired for thisoperation< ach of the ): #orkers #orks 1 productive hoursper #eek


35/41

1


8ith t%o constraints, the resu$ts are as "o$$o%s:

hort-ter& Product-Mi+ Decision:T%o Production Constraints


36/41

4


37/41


• Janagers must be sure to keep the firm;s strategicobIectives in the forefront in any decision situation toavoid focusing solely on short-term gains

• $re ator# pricing occurs #hen a company has setprices belo# average variable cost #ith a plan to raiseprices later to recover losses from these lo#er prices

Courts have found in favor of the defendants time aftertime in cases involving predatory pricing

U


38/41


• Janagement;s goal should be to ma&imi"e contributionmargin #hile minimi"ing fi&ed costs *elevant cost analysis focuses on variable costs,

appearing to ignore fi&ed costs

+f upper-level management focuses too heavily on variablecosts, lo#er-level management may feel pressure toreplace variable costs #ith fi&ed costs at the firm;s e&pense

• Janagers must be careful not to include irrelevant,including sunk, costs in their decision making Hhen fi&ed costs are sho#n as cost per unit, many

managers tend to improperly classify them as relevant

ehaviora$ and ;&p$e&entation;ssues (continued)

7


39/41


• ! relevant cost is a future cost that differs bet#eendecision alternatives

• +t is important to consider strategic %actors #henperforming a relevant cost analysis

.ocusing solely on short-term profits could potentiallylead to long-term losses

Chapter u&&ar

):


40/41

)


Chapter u&&ar (continued)

8his decision frame#ork in this chapter #as applied tofour common management decisions>

8he special-or er ecision 8he make& lease& or '(# ecision 8he ecision to sell or process %(rther ecision $ro%ita'ilit# anal#sis $i


41/41

)

Chapter u&&ar (continued)

• *elevant cost analysis changes significantly #ith t#o ormore products and limited resources

Under conditions of one or more production constraints,the goal is to find the most profitable sales mi&

.or decision-making purposes, product profitability mustbe e&pressed in terms of contribution margin per unit ofthe scare resource

• Janagers must be careful to encourage ma&imi"ationof contribution margin and reduction of fi&ed costs

• +rrelevant, including sunk, costs must not be included inrelevant cost analysis

chapter09_decision making & relevant invformation.ppt

Documents