Managerial Accounting: An Introduction To Concepts, Methods, And Uses

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Managerial Accounting An Introduction To
Concepts, Methods, And Uses

• Chapter 7
• Differential Cost Analysis
• for Operating Decisions

Maher, Stickney and Weil
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Learning Objectives (Slide 1 of 3)

• Explain the differential principle know how to
  identify costs for differential analysis.
• Explain the relation between costs prices.
• Explain how to base target costs on target
  prices.
• Describe how to use differential analysis to
  measure customer profitability.

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Learning Objectives (Slide 2 of 3)

• Explain why businesses apply differential
  analysis to product choice decisions.
• Explain the theory of constraints.
• Identify the factors underlying make-or- buy
  decisions.
• Explain how to identify the costs of producing
  joint products the relevant costs for decisions
  to sell or process further.

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Learning Objectives (Slide 3 of 3)

• Explain the use of differential analysis to
  determine when to add or drop parts of operations
• Identify the factors of inventory management
  decisions.
• Explain how linear programming optimizes the use
  of scare resources (Appendix 8.1)
• Identify the use of the economic order quantity
  model (Appendix 8.2)

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Describe Define Differential Analysis
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Differential Analysis Model
Alternative - Status Quo Difference
Revenue Revenue Revenue Change in Revenue
Less Variable Costs (VC) VC - VC Change in VC
Total Contribution Margin (CM) CM CM Change in CM
Less Fixed Costs Fixed Costs - Fixed Costs Change in Fixed Costs
Operating Profit Profit - Profit Change in Profit

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Differential Analysis Cont.

• A cost (or revenue) is relevant only if it
  differs between alternatives under consideration
• Focus is typically on cash flows because
• Cash is the medium of exchange
• Cash is a common, objective measure of benefits
  and costs of alternatives

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What are the three major influences on pricing?
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Review Short-Run vs. Long-Run Pricing Decisions

• Time horizon of a decision is important in
  determining relevant costs in a pricing decision
• Short-run decisions include pricing for a
  one-time special order
• Long-run decisions include pricing a main product
  in a major market

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What is the differential approach to pricing?
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Long-Run Pricing Decisions (Slide 1 of 3)

• Define Full cost

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Review the Value Chain
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Long-Run Pricing Decisions (Slide 3 of 3)

• Full cost approach is justified in pricing
  decisions when
• Entering into long-term contracts to supply a
  product
• Developing and producing a customized product
• Initially setting prices, then adjusting for
  market conditions

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Review Life-Cycle Product Costing and Pricing
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Explain Using Target Prices to Set Target Costs
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Explain Legal Issues Relating Costs to Prices
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Customer Profitability

• Differential analysis is useful in determining
  which customers to keep or drop
• Dropping a customer should result in cost savings
  in excess of lost revenue
• Alternative uses of extra capacity available
  after dropping a customer should be included in
  the analysis

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What are the four general categories of customer
costs?

• Customer costs generally consist of the following
  4 categories of activities
• ABC provides a better understanding of the cost
  of these activities

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Build a Chart of Activities to Compute Customer
Costs
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Comment on Decisions when Scarce Resources are
Limited
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Decisions with Scarce Resources
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Define the Following

• Theory of Constraints
• Bottleneck
• Throughput Contribution

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List the Five Steps to Managing Bottlenecks
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Name Three Options to Relieve a Bottleneck
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Explain Make or Buy Decisions
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Define the Following

• Split-Off Point
• Joint Costs
• Additional Processing Costs

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How do you decide whether to process further or
not?
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• If you have any comments or suggestions
  concerning this PowerPoint Presentation for
  Managerial Accounting, An Introduction To
  Concepts, Methods, And Uses, please contact
• Dr. Michael Blue, CFE, CPA, CMA
• blue_at_bloomu.edu
• Bloomsburg University of Pennsylvania