ACCT 2301 Chapter Notes - Chapter 6: Vertical Integration, Contribution Margin, Exxonmobil

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redmanatee539

16 Dec 2016

School

Northeastern University

Department

Accounting

Course

ACCT 2301

Professor

2301

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Document Summary

Relevant information: decision-making information about costs, cost savings, or revenues that: (1) is future-oriented and (2) differs among the available alternatives; decision specific (information relevant to one decision may not be relevant to. Sunk cost: costs that have been previously incurred; not relevant for decision making. For example, in an equipment replacement decision, the cost paid for the existing machine presently in use is a nonavoidable sunk cost because it has already been incurred. Opportunity cost: cost of lost opportunities such as revenue forgone because of insufficient inventory. Relevant cost: future-oriented costs that differ among alternative business decisions; also known as avoidable costs: can be either fixed or variable (whether cost is fixed or variable has no bearing on its relevance. Relevance is context sensitive: a particular cost that is relevant in one context may be irrelevant in another. Fifty cents can be avoided by choosing cakes instead of pies.

Related Questions

1. Which of the following costs is not relevant in aspecial-order decision?
A. Direct labor
B. Direct materials
C. Variable overhead
D. Fixed overhead

2. Costs that change across decision alternatives are
A. accounting costs.
B. activity-based costs.
C. incremental costs.
D. capital costs.

4. The potential benefit of one alternative that is lost bychoosing another is known as a(n):
A. Sunk cost
B. Out-of-pocket cost
C. Differential cost
D. Opportunity cost

5. A cost that cannot be avoided or changed because it arisesfrom a past decision, and is irrelevant to future decisions, iscalled a(n):
A. Uncontrollable cost
B. Incremental cost
C. Opportunity cost
D. Sunk cost

6. An additional cost that is incurred only if a particularaction is taken is a(n):
A. Period cost
B. Pocket cost
C. Discount cost
D. Incremental cost

7. The payback period:
a. Is the length of time necessary to recover the entire cost of aninvestment from its resulting annual net cash flow.
b. Is the length of time necessary to recover the entire cost of aninvestment from its resulting annual net income.
c. Takes into consideration the profitability of an investment overits entire life, but ignores the timing of its future cashflows.
d. Takes into consideration both the profitability of an investmentover its entire life and the timing of its future cash flows.

emeralddeer628

Tactical decision making

Tactical decision making means choosing among alternatives withan immediate or limited end in view. For example, a company mayaccept a special order for less than the normal selling price touse idle capacity. Tactical decisions tend to be short-runin nature; however, it should be emphasized that short-rundecisions often have long-run consequences. A general tacticaldecision-making model is outlined here.

1.	Recognize and define theproblem.
2.	Identify possible alternativesolutions to the problem, and eliminate any unfeasiblealternatives.
3.	Identify the costs and benefitsassociated with each feasible alternative. Eliminate the costs andbenefits that are not relevant to the decision.
4.	Compare the relevant costsand benefits for each alternative.
5.	Assess qualitative factors.
6.	Select the alternative with thegreatest overall benefit.

Identifying and comparing relevant costs and revenues is theheart of the tactical decision model. Relevant costs (revenues) arefuture costs (revenues) that differ across alternatives. (Revenuesare treated in the same way as costs, so we will simplify thediscussion by referring to costs.) All decisions relate to thefuture; so, only future costs can be relevant. In addition, thecost must differ from one alternative to another. If a future costis the same for more than one alternative, it has no effect on thedecision. Such a cost is an irrelevant cost.

Assume that Reeves Company is considering accepting a specialorder for $25 per unit when the normal selling price is $30 perunit. Reeves has enough excess capacity to make the order withoutdisplacing normal sales. The alternatives facing Reeves Company are(Select "Yes" for the statements that are applicable and "No" forthe items that do not apply):

Accept the special order.	- Select your answer -YesNoItem1
Reject the special order.	- Select your answer -YesNoItem2
Sell normal sales for $25 perunit.	- Select your answer -YesNoItem3

Choose which of the following are relevant in deciding whetheror not to accept the special order. (Select "Yes" for thestatements that are applicable and "No" for the items that do notapply)

$25 price.	- Select your answer -YesNoItem4
$30 normal price.	- Select your answer -YesNoItem5
Variable cost of making the unitsin the special order.	- Select your answer -YesNoItem6
Depreciation on factory equipmentused in making the special order units.	- Select your answer -YesNoItem7
Increased property taxes on thefactory building which are due while the special order would bemade.	- Select your answer -YesNoItem8

While cost and revenue information is important, otherinformation may be needed to make an informed decision. Thesenon-financial factors are termed qualitative and are often relevantin decision making. For example, in deciding whether to make acomponent in-house or purchase it from an outside supplier, thecompany may consider any difference in quality or in responsivenessto the company's production schedules.

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ABC Company has just received a special order for 1,000 deckchairs. ABC has sufficient idle capacity to accept the order.Indicate whether the given cost is a sunk cost, opportunity cost,relevant or not relevant to the decision to accept the specialorder, variable or fixed. A variable cost is one that varies withthe number of chairs that Halley makes. Note: you will choosemultiple options for each scenario.
1. Raw materials to make 1,000 deck chairs
2. Depreciation on equipment that will be used to make chairs
3. Revenue that could be earned if special order is notaccepted
4. Salary of the production department manager (department thatwill make the chairs)
5.Equipment set-up costs incurred to make the chairs
6. Company president's salary
7. Material's handling cost
8. Effect of accepting the order on Company's reputation
9. Engineering design costs incurred when chair's design was firstdeveloped
10. Engineering design costs incurred to customize the chairs tocustomers' specifications
11. Direct labor costs to make 1,000 chairs
12. Maintenance on the equipment that would have been performedduring the idle time if the order had not been accepted
13. manager's estimates of revenue that may be generated from thiscustomer in the future if the special order is accepted

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ACCT 2301 Chapter Notes - Chapter 6: Vertical Integration, Contribution Margin, Exxonmobil

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