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8/9/2019 Chapter09_Decision Making & Relevant Invformation.ppt
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
Decision Making with RelevantCosts an a !trategic "mphasis
Chapter Nine
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
• 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
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
• 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 $so-called %product-mi&' decisions(
• Discuss behavioral, implementation, and legal issues indecision making
Learning Objectives (continued)
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
The Decision-Making Process
Third: *elevant Cost !nalysisand Strategic Cost !nalysis
econd: Specify the Criteriaand +dentify the
!lternative !ctions
econd: Specify the Criteriaand +dentify the
!lternative !ctions
!irst: Determine theStrategic +ssues
!irst: Determine theStrategic +ssues
!ourth: Select and+mplement a
Course of !ction
!ourth: Select and
+mplement aCourse of !ction
!i"th: valuateerformance
!i"th: valuateerformance
+dentify and Collect*elevant +nformation
+dentify and Collect*elevant +nformation
redict .uture /alues of *elevant Costs 0 *evenues
redict .uture /alues of *elevant Costs 0 *evenues
Consider Strategic +ssues
Consider Strategic +ssues
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
*uip&ent-'ep$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
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
*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$evant costs are6666
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
'e$evant Cost #na$ sis:#dditiona$ Considerations
• atch-$eve$ cost drivers shou$d be considered inre$evant cost ana$ sis
.or e&le, 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$ternative options
.or e&le, addition of a ne# product could causereduction, delay, or lost sales in other product areas
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
'e$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$itative "actors:
Differences in 6uality .unctionality 8imeliness of delivery *eliability in shipping !fter-sale service level
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
trategic in"or&ation keeps the decision &aker
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
'e$evant Cost #na$ sis vs6trategic Cost #na$ sis
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
'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
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
• ! 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 $an e&le follo#s(>
+a&p$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$d be accepted9
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
The pecia$-Order Decision (continued)
8he costs that arenot relevant total?)1:,:::
8otal Cost @ ?1
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
The pecia$-Order Decision (continued)
#na$ 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 $9,::: 8-shirts ?9
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
@T666to &ake an in"or&ed decision, TT &ust a$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
The pecia$-Order Decision (continued)
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
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&le 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<
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
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
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Let
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
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
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
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
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
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)
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
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 ?)
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
e$$-or-Process !urther +a&p$e(continued)
8he net advantage to reprinting the 8-shirts is ?55: $?2,35: -?9,5::(< 88S #ould need to consider the effect of selling to discount
stores #ere the cost analysis in favor of that option<
8he net advantage to reprinting the 8-shirts is ?55: $?2,35: -?9,5::(< 88S #ould need to consider the effect of selling to discount
stores #ere the cost analysis in favor of that option<
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
Pro"itabi$it ana$ sis addresses issues such as: Hhich product lines are most profitable !re the products priced properly Hhich products should be promoted and advertised more
aggressively Hhich product-line managers should be re#arded
#n e+a&p$e "o$$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
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
Pro"itabi$it #na$ sis (continued)
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
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,::: $?9)4,::: -?9 2,:::( better off retaining rather
than deleting the %Kale' Iacket<Hindbreakers, +nc< should alsoconsider strategic factors in this
decision, such as #hether dropping oneproduct line #ould affect sales of
another and #hether employee morale#ould be affected by the decision<
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
Pro"itabi$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$e 8o&en
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
Eo% to &ake best use out o" e+isting resources9 Thatis, ho% to choose the best short-ter& product &i+9
Continuing %ith the 8indbreaker
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
hort-Ter& Product Mi+ Decision:One Production Constraint
8he goal is to ma&imi"e contribution margin, subIect tothe production resource constraint< .or this, #e need todetermine each product;s contribution margin per unit ofthe scare resource>
2
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
hort-ter& Product Mi+ Decision:One Production Constraint
@nits o"a$es
"or >a$e
@nits o" a$es"or 8ind
4?,000
/ .
, 0 0 0
2 2
Production constraint "or
se%ing &achine6 #$$possib$e sa$es &i+es arerepresented on this $ine6
$ope -4?,000 F /.,000 -47/;ntercept 4?,000
$ope -4?,000 F /.,000 -47/;ntercept 4?,000
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
hort-ter& Product-Mi+ Decision:One Production Constraint
Production o" 8ind is "avored over production o" >a$e( 1=/,000 - 1..,000)6 8hen there is one constraint, one o"the products %i$$ be "avored over the others6
)
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
+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&le 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
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
8ith t%o constraints, the resu$ts are as "o$$o%s:
hort-ter& Product-Mi+ Decision:T%o Production Constraints
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
• Janagers must be sure to keep the firm;s strategicobIectives in the forefront in any decision situation toavoid focusing solely on short-term gains
• $re ator# pricing occurs #hen a company has setprices belo# average variable cost #ith a plan to raiseprices later to recover losses from these lo#er prices
Courts have found in favor of the defendants time aftertime in cases involving predatory pricing
U
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
• Janagement;s goal should be to ma&imi"e contributionmargin #hile minimi"ing fi&ed costs *elevant cost analysis focuses on variable costs,
appearing to ignore fi&ed costs
+f upper-level management focuses too heavily on variablecosts, lo#er-level management may feel pressure toreplace variable costs #ith fi&ed costs at the firm;s e&pense
• Janagers must be careful not to include irrelevant,including sunk, costs in their decision making Hhen fi&ed costs are sho#n as cost per unit, many
managers tend to improperly classify them as relevant
ehaviora$ and ;&p$e&entation;ssues (continued)
7
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
• ! 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
):
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Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
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
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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