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accting chapter 12

Terms in this set (27)

A managers most important responsibility is
to make good decisions
key concepts of decision making
1. define the alternatives
2. identify criteria for the best alternative
3.Differential analysis
4.identify/eliminate sunk cost
5)future costs that don't differ from alternatives ae eliminated
6. opportunity costs
Define the alternaitves you choose from
...
identify criteria for choosing best alternative
Usually is the most money or most served
use differential analysis
identify relevant costs and benefits

Focus on future cost and benefit that differ between alternatives,

incremental costs and avoidable costs are differential/relevant

only focus on differential relevant cost when making a decision

quantitative factors may be considered
Identify and eliminate sunk costs
sunk costs are irrelvant
future costs or benefits that do not differ between alternatives are irrelevant
identify them and eliminate them
consider opportunity costs in your decision
if you identify relevant concrete opp costs that will be given up if you choose and alternative plan
Most decisions pursue a financial advantage
has greater cash inflow
accounting depreciation is
not real

is the allocated cost over the years benefited (usually irrelevant except taxes)

(economic depreciation is)
any desicion can be approached from a
total costs analysis and a differential costs approach and give you the same numbers
which is better?
Differential costs cuz more effective and easier to isolate true changes. can be used in almost any situation

total approach mixed relevant and irrelevant costs together
Common fixed costs that are allocated are usually
irrelavent and apart of bad decision making
value chain
developing a product to the sale of the product

each step causes the product to become more valuable
vertical integration is
when a company carries out all of the value chain activities
vertical integration has advantages
less dependant on suppliers, smoother flow, quality control,
current trends are
less vertical

apple= not vertical
if a product line is stopped the floor space it once used can generate revenue in another way
opportunity costs is present
direct labor
variable costs
a special order is a
one time order that is not considered as part of the company's normal ongoing operations
if you accept a special order
incremental revenue is greater than incremental costs
theory of constraints
Theory of Contraints (TOC)
...
constraint is
anything that prevents output (bottleneck)
after weakest constraint improved
find next weakest
sometimes it is better to focus on
contribution margin per unit of constrained output than CM per product
operating at full capacity means the plant cannot
make more

it DOES NOT mean that every person or machine is at full capacity
managers can increase profits in full Capacity plant by
producing products with the highest CM per unit of constrained resource and improving the constraint that causes full capacity situation (relaxing on elevating the constraint)
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