Relevant_Costing_Examples

# Relevant_Costing_Examples - MAIN RELEVANT COSTING DECISIONS...

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Page 1 of 17 MAIN RELEVANT COSTING DECISIONS A. SELL OR PROCESS FURTHER (Text page 532 – Sunk Costs and Joint Processes) B. EQUIPMENT REPLACEMENT (Text page 535 – Equipment Replacement Decisions) C. MAKE OR BUY DECISIONS (OR OUTSOURCING) (Text page 540 – Make or Outsource) D. SCARCE RESOURCES (UTILIZATION OF SCARCE RESOURCES) (Text page 546 – Scarce Resources) E. SPECIAL ORDERS – ACCEPT OR REJECT OR PRICING OF SPECIAL ORDERS (Text page 554) F. ADD OR DROP PRODUCT LINES (Text page 555 AND Text Page 559) G. SALES MIX AND SALES PRICING DECISIONS (Text page 548 Sales Mix and Pricing)

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Page 2 of 17 A. SELL OR PROCESS FURTHER What is it? Applies where there is a joint process. separable costs = \$\$ Product A Joint process separable costs = \$\$ Product B separable costs = \$\$ Split off point Product C SELL HERE VERSUS SELL HERE Revenue here VERSUS Revenue (separable costs) Net revenue whichever is the highest is what should be pursued NOTE THAT JOINT COSTS ARE IRRELEVANT!!!!
Page 3 of 17 Example: Joint costs \$17,760 Three products, A, B, and C Input required per unit of output A 2.0 kilos B 1.5 kilos C 1.0 kilos Total kilos put into production 10,000 Total units produced A 2,100 B 2,000 C 2,200 Selling prices At split off After processing A 4.60 12.40 B 3.50 11.10 C 4.00 14.20 Separable costs A \$ 12,692 B \$ 14,700 C \$ 18,432

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Page 4 of 17 SOLUTION: Units started kilos Kilos A 2.0 kilos 4,444 ÷ 2 2,222 B 1.5 kilos 3,333 ÷ 1.5 2,222 C 1.0 kilos 2,222 ÷ 1 2,222 10,000 kilos 6,666 units Units finished (given) Units finished A 2,100 B 2,000 C 2,200 Shrinkage A B A - B Units finished Units started Shrinkage A 2,100 2,222 122 B 2,000 2,222 222 C 2,200 2,222 22
Page 5 of 17 Solution continued: 2,222 separable costs = 12,692 2100 Product A SP = 12.4 2,222 Joint Costs = 17,760 separable costs = 14,700 2000 Product B SP = 11.10 separable costs = 18,432 2200 Split off point 2,222 Product C SP = 14.20 SELL HERE VERSUS SELL HERE Revenue here VERSUS Revenue (separable costs) Net revenue whichever is the highest is what should be pursued NOTE THAT JOINT COSTS ARE IRRELEVANT!!!! It is more profitable to process A and C further and to sell B at split off (don’t process B further) Revenue at split pff Net revenue after further processing A 2,222 x 4.60 = 10,221 2,100 x 12.40 = 26,040 12,692 13,348 B 2,222 x 3.50 = 7,777 2,000 x 11.10 = 22,200 14,700 7,500 C 2,222 x 4.00 = 8,888 2,200 x 14.20 = 31,240 18,432 12,808

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Page 6 of 17 B. EQUIPMENT REPLACEMENT (Text page 535 – Equipment Replacement Decisions) What is it? Company has an old machine and is deciding whether or not to replace it. What costs are relevant? –any cost or outlay that is future and differential Example – #’s from page 537 of text 2 machines, each has a three year remaining life; trying to decide whether to buy a new machine or not Old machine New machine Relevant Cost \$3200 paid one year ago \$2300 cost if I buy today (2,300) -> NOT relevant b/c is a PAST cost (not a future cost) ->Future cost,
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## This note was uploaded on 03/01/2011 for the course ADMS 2510 taught by Professor Beavis during the Spring '08 term at York University.

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Relevant_Costing_Examples - MAIN RELEVANT COSTING DECISIONS...

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