JJ07 - The Use of Cost Information In Management Decision...

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1 The Use of Cost Information In Management Decision Making Chapter 7: Incremental Analysis 1. Incremental Analysis looks at a. Incremental Revenue b. Incremental Cost ± a.k.a. Relevant cost ± a.k.a. Differential cost 2. The only thing that matters is what changes. When Your Boss Asks… You Should Say… 1. There is no single cost number that is relevant for all decisions.
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2 Analysis of Decisions Faced By Managers 1. Engage in additional processing. 2. Make or Buy. 3. Drop a product line. Additional Processing Decision 1. The key is on incremental revenues and costs. 2. Sunk costs (past costs) are irrelevant. Additional Processing Example: (7-1) Revenue Less: Prior production costs Material Labor Variable overhead Fixed overhead Additional Processing costs Material Labor Variable overhead Gain (loss) per unit Sell in Current State of Completion (Alternative 1) Complete Processing (Alternative 2) Incremental Revenue and Costs (Alternavive 2 minus Alternative 1) $500 300 200 100 200 800 0 0 0 0 ($300) $1,000 300 200 100 200 800 200 100 100 0 0 200 100 100 400 $100 PowerComp 400 ($200) $500 0 0 0
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3 Make-Or-Buy Decisions 1. The key is on incremental costs. There are no incremental revenues. 2. Note that not all fixed costs are
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This note was uploaded on 05/12/2010 for the course ACG 5065 taught by Professor Asare during the Spring '08 term at University of Florida.

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JJ07 - The Use of Cost Information In Management Decision...

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