Accountancy 200 Fundamentals of Accounting

1
Accountancy 200Fundamentals of Accounting

• NATURE OF COSTS - I

2
Economics

• What does economics study?
• Business uses expected value to measure
  greatest value

3
Expected Value

• The elements of expected value
• Alternatives
• Outcomes and values
• Decision objective

4
Mathematical Expected Value
jEVi S pjVj EV of i p of j Vof j
Our decision objective is
5
Outcome Value

• The value of an outcome is its net benefit, which
  is a combination of
• Thus, to choose among options, managers require
  information about

6
Post-Decision Options
At every period subsequent to choosing an option,
managers face an expanded set of options with
respect to their original choice
7
Differential Analysis
Differential, or marginal, analysis is a method
of avoiding the measurement of all costs and
benefits associated with each option that we wish
to evaluate.
We can compare only those costs and benefits that
differ among our options.
8
NP2-3 Differential Costs and Revenues
A hardware store is considering opening Sunday.
The differential costs of paying for salespeople
and utilities is 1,000 per Sunday. Sales each
Sunday are expected to be 10,000. The sales
price of an item is determined by taking the
purchase price of the item and adding 20.
9
NP2-3 Differential Costs and Revenues
If sales on Sunday do not affect sales the rest
of the week, should the hardware store open on
Sunday if the goal is to increase profit?

• Differential revenues per Sunday
• Differential costs per Sunday Purchase cost
  0.20 x Purchase cost Sales
• Cost of goods sold
• Operating costs
• Net benefit

10
NP2-3 Differential Costs and Revenues
Should the hardware store open on Sundays if 60
of the sales on Sundays would have occurred on
the other days of the week at the hardware store?

• Differential revenues per Sunday Portion of
  Sunday sales that would not have occurred on
  other days
• Sunday only sales
• Differential costs per Sunday Cost of goods
  sold
• Operating costs
• Net benefit per Sunday

11
NP2-3 Differential Costs and Revenues
Assume there is a 50-50 chance of either no
effect on other sales or the stated effect?
Should the hardware store open on Sunday?

• Expected value of no effect on other sales
• Expected value of stated effect on other sales
• Net expected value

12
Opportunity Cost

• Opportunity cost is the potential benefit given
  up when the choice of one action precludes
  selection of a different action.
• To measure opportunity cost of an action, one
  should identify the next best uses of the
  resources to be committed to the action.

13
NP 2-5 Opportunity Cost of Materials

• Emrich cleans stainless steel parts in acid bath
  mixtures.
• On May 12, Emrich ordered a 50-gallon drum of
  GX-100 acid for use on a May 15 job, paying
  1,000 for the acid. It used 25 gallons on this
  job. Because the acid has a 30-day shelf life
  from its opening and Emrich did not anticipate
  using the remaining acid by June 15, it included
  in the price of the job the full 1,000 acid cost
  plus the anticipated 400 disposal fee for the
  unused acid.

14
NP 2-5 Opportunity Cost of Materials

• Unexpectedly on June 1, a customer wants a quote
  on a job that will require the remainder of the
  GX-100 on June 5. What cost amount for the
  GX-100 should be considered in preparing this job
  bid?