Mowen--Chapter 13--revised(1)

Mowen--Chapter 13--revised(1) - Chapter Thirteen Short-Run...

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Chapter Thirteen Short-Run Decision Making: Relevant Costing
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Learning Objectives 1. Describe the short-run decision-making model, and explain how cost behavior affects the information used to make decisions 2. Apply relevant costing and decision-making concepts in a variety of business situations 3. Choose the optimal product mix when faced with one constrained resource 4. Explain the impact of pricing decisions. 22
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OBJECTIVE h 1 Describe the short-run decision-making model, and explain how cost behavior affects the information used to make decisions.
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Short-Run Decisions Small-scale actions that serve a larger purpose Decisions are made using a decision model Used to structure the thinking process Organizes information Consists of choosing among alternatives with an immediate or limited end in view 44
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Decision-Making Model 1. Define the problem 2. Identify the alternatives 3. Identify the costs and benefits associated with each feasible alternative 4. Total the relevant costs and benefits for each alternative Relevant costs are future costs that differ across alternatives 5. Assess the qualitative factors 6. Select alternative with the greatest benefit 55
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Relevant Costs Can consist of both variable and fixed costs Additional fixed costs associated with an alternative are relevant Changes in supply and demand for resources must be considered Cost which fluctuate with changes in supply and demand across alternatives are relevant costs Also known as differential or incremental costs Practical interpretation All costs that are different 66
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OBJECTIVE h 2 Apply relevant costing decision-making concepts in a variety of business situations.
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Make-or-Buy Decisions Decisions involving a choice between internal and external production Decision process Identify feasible alternatives Identify which costs are relevant Fixed overhead costs are most likely irrelevant since they will not differ Compare the total relevant costs of manufacturing with the cost of buying Make a choice 88
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HOW TO Structure a Make-or-Buy Problem 99
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Example Information: Direct materials Direct labor Variable overhead Fixed overhead Unit Cost Total Cost $10,000 $1.00 20,000 2.00 8,000 0.80 44,000 4.40 Total $82,000 $8.20 Determine if it would be cheaper to make 10,000 units of a component in-house or to purchase them from an outside supplier for $4.75 each. 1010
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Example Information continued: Fixed overhead will continue whether the component is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. 1111
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Example 1. What are the alternatives? 2. List the relevant cost(s) of internal production and of external purchase. 3.
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Mowen--Chapter 13--revised(1) - Chapter Thirteen Short-Run...

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