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Ch. 6 Short Term Decision Making
Intro To Managerial Accounting (ACC 222)
Miami University
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Relevant Analysis- 1. Explain factors that give rise to short-term decisions 2. Evaluate decision options using the principle of relevance 3. Make short-term decisions such as special-order pricing make-or-buy decisions 4. Determine the best use of constrained resources
Arise to gaps between the supply of and demand for capacity - Excess supply of capacity: we have more capacity than we’re using - Should we accept special orders for discounted prices? Use excess capacity to make some stuff in-house instead of outsourcing it. Excess demand - We don’t have enough capacity to meet the demand for our product - Should we outsource some production to free up capacity? Change product mix to favor more profitable products
Relevant Analysis - Relevant costs and revenues - are expected costs or revenues (cash flows) that differ across decision options
Relevant cost and revenues 1. Must be a future cash flow (i., not a sunk cost), AND 2. Must differ across decision options under consideration
Why these two criteria? We want to know “What difference (in costs and/or revenues) will a course of action will make?
Relevant Analysis Relevance is not the same as variable/fixed - Fixed costs don’t change when output changes, so they’re usually not relevant. Except when they are! - Variable Costs Change when output changes, so they’re usually relevant. Except when they’re not!
Can only define relevance in the context of a decision. Cost or revenue that is relevant to one decision might not be relevant to another decision
Special Order When there is excess capacity, we can sometimes put the capacity to work for additional profit
Special orders at discounted prices can be profitable even if the selling pce is considerably less than regular selling price
- As long as they give us more money than we have to produce it, its a green light
To decide whether to accept a special order, compare the relevant revenue from the order to
the relevant costs (including opportunity cost) of providing the order
- Customer wants to buy 11,000 boards at $15 per board
- Wants delivery within 3 months
- All or nothing order; one shot deal
Costs for special order boards - Direct materials per unit will be $2 less than normal - No change in direct labor cost or VMOH rate - $6,100 in additional direct fixed costs (new artwork) - $1,800 in allocated common overhead (cost of doing business). Total fixed overhead of $750,000 will not change
Four conceptual
- Two special order
- Two make or buy
- Two resources
Ch. 6 Short Term Decision Making
Course: Intro To Managerial Accounting (ACC 222)
University: Miami University
