Chapter 09.pdf - Road Map for the next 7 weeks LONG-TERM...

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1 1 Road Map for the next 7 weeks LONG-TERM DECISIONS Capacity resources (buildings, equipment, skilled staff) are fixed in the short term but can be adjusted in the long term => capacity costs are relevant for long-term decisions => need to think about capacity resources and capacity costs (aka fixed costs) in making long-term decisions Outline: Ch 9: cost allocations – making sense of capacity costs Ch 10: activity-based costing (ABC) – making even more sense of capacity costs Ch 11: long-term investment decisions Ch 12: long-term performance evaluation Ch 13: strategic planning and control Chapter 9 Cost Allocations
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2 3 Lecture Outline Cost allocation Basic allocation Refined allocation with multiple cost pools and drivers Using cost allocation for long-term decisions Keep or drop a product line? How is this analysis different from the short term? 4 Why do we care? Capacity costs (fixed costs) are HUGE: about 40% of total costs in manufacturing, >90% of total costs in many service industries Capacity costs are MESSY: cannot be traced to individual product lines Cost allocations help us understand/predict these costs => better long-term decisions
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3 5 Main Complication: Shared Capacity Costs Standard Deluxe Total Sales volume (in units) 200 100 300 Revenue $120,000 $100,000 $220,000 Variable Costs Direct materials $40,000 $30,000 $70,000 Direct labor $5,000 $20,000 25,000 SG&A (selling, general & admin) $10,000 $15,000 25,000 Contribution margin $65,000 $35,000 $100,000 Fixed Costs Manufacturing overhead $50,000 SG&A (selling, general & admin) 30,000 Profit $20,000 RIP Mattress Company has two product lines: Standard and Deluxe. Shared capacity costs: • cannot be traced to individual product lines • a large fraction of total costs (40%) => we want to know: (1) How can we divide them between Standard and Deluxe? (2) How will they change with our long-term decisions? We use cost allocation to answer these questions. 6 Cost Allocation: General Idea 1. Find a cost driver that has a clear cause-and-effect relation with the usage of capacity resources Firm A is labor-intensive. The main capacity resources (buildings, equipment, labor supervisors) support direct labor in the assembly of the finished products. Choose the best cost driver: number of units produced machine hours direct labor hours number of different product lines Firm B is machine-intensive. The capacity resources (buildings, machines, maintenance staff) support automated production in computer-controlled machines. Choose the best cost driver: number of units produced machine hours direct labor hours
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  • Spring '10
  • GARY
  • FC, capacity costs, RIP Mattress Company

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