Financial and Managerial Accounting, 8th Edition
23-1
CHAPTER 23
RELEVANT COSTING FOR MANAGERIAL DECISIONS
Related Assignment Materials
Student Learning Objectives
Discussion
Questions
Quick
Studies*
Exercises*
Problems*
AA and BTN
1, 2, 3, 4, 5, 6,
23-1, 23-3,
AA 23-1, AA 23-3,
23-6, 23-7,
23-19
23-1, 23-2
23-3
BTN 23-3
23-5, 23-8,
23-9, 23-10
23-3, 23-4,
23-5
23-4
23-11
23-6, 23-7
23-5, SP
BTN 23-1, BTN 23-5
9
23-12, 23-13
23-8, 23-9
23-6
23-16, 23-17,
23-13, 23–14
*See additional information on next page that pertains to these quick studies, exercises and problems.
SP refers to the Serial Problem
AA refers to Accounting Analysis
P5
Evaluate keep or replace decisions.
Financial and Managerial Accounting, 8th Edition
Additional Information on Related Assignment Material
See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available in
Connect.
Connect
Available on the instructor’s course-specific website, Connect:
• All numerical Quick Studies, all Exercises and Problems Set A.
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints without
Need-to-Know Videos
LO
Need–to-Know
Title
Time
C1
23-1
Relevant costs and benefits
0:29
23-2
Make or buy
0:55
23-3
Sell or process
2:04
23-4
Sales Mix
3:15
23-6
Special Order
3:04
Concept Overview Videos
LO
Title
Time
C1
Describe the importance of relevant costs for short-term decisions.
Decision Making
Relevant Costs and Benefits
Evaluate short-term managerial decisions using relevant words.
Time and Materials Pricing
P1
Evaluate make or buy decisions.
P2
Evaluate sell or process further decisions.
Sell Process Further
Scrap or Rework
P3
Determine sales mix with constrained resources.
Sales Mix Selection When Resources are Constrained
P4
Evaluate segment elimination decisions.
Segment Elimination
Financial and Managerial Accounting, 8th Edition
23-3
Keep or Replace Equipment
P6
Determine product selling price using cost data.
Total Cost Method
Total Cost Method — Illustration
Evaluate special offer decisions.
Special Offers
Synopsis of Chapter Revision
NEW opener—Solugen and entrepreneurial assignment.
Organized decision scenarios into three types: Production, capacity, and pricing.
Expanded discussion of product pricing.
Financial and Managerial Accounting, 8th Edition
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Chapter Outline
I. Decisions and Information
A. Decision Making
1. Five steps involved in managerial decision making.
a. Define task and goal
2. Both managerial and financial accounting information play important role in making decisions
a. Accounting system provides primarily financial information such as performance reports and
B. Relevant Costs and Benefits
1. Managers should focus on relevant benefits and relevant costs.
a. Relevant costs are the incremental costs, or differential costs which are the additional costs
incurred if a company pursues a certain course of action.
b. Incremental revenues are the additional revenue generated by selecting a certain course of
II. Production Decisions
A. Make or Buy
1. When determining whether to make or buy a component of a product, only incremental costs are
relevant.
4. Process of buying from an external supplier is called outsourcing. Several other factors should be
considered.
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B. Sell or Process Further
1. Partially completed products can be sold as is or they can be processed further and then sold as other
products.
C. Scrap or Rework – variation of sell or process decision.
1. Costs already incurred in manufacturing units of product not meeting quality are sunk costs and are
D. Sales Mix Selection When Resources Are Constrained
1. When more than one product is sold, some are likely to be more profitable than others; management
should concentrate sales efforts on more profitable products.
2. If production facilities or other factors are limited, an increase in production and sale of one product
usually requires reduction in production and sale of others.
E. Segment Elimination
1. If segment, division, or store is performing poorly, management must consider eliminating it.
2. It is not sufficient to base the decision on net income (loss) or its contribution to overhead.
3. Need to consider avoidable and unavoidable expenses:
a. Avoidable (or escapable) expenses are costs or expenses that would not be incurred if the
4. Decision rule – Segment is candidate for elimination if its revenues are less than its avoidable
expenses.
5. Should also assess impact of elimination on other segments.
a. Profitable segment might be eliminated if its space, assets and staff can be more profitably used
Financial and Managerial Accounting, 8th Edition
purchase price of the new equipment.
a. Net purchase price is the cost of the new equipment less any trade in allowance given or cash
G. Pricing Decisions – managers consider several factors in setting normal prices including:
1. Target profit – expected return on investment (ROI)
2. Customer demand – how much customers will pay and how will the respond to price increases.
H. Cost-plus methods common when companies are price-setters. Management adds a markup to cost to
reach a target price.
1. Total cost method – management sets price equal to product’s total cost plus a desired profit on the
product.
a. Total cost = product costs (Direct Materials + Direct Labor + overhead costs) + selling and
administrative costs.
2. Target costing – used when competition is high and they have little control in setting prices.
Target cost = expected selling price – desired profit
3. Variable cost method – the markup percentage is determined as:
4. Increased global competition and technological advances have led to other pricing methods:
a. Value-based pricing – focuses on what customers value.
I. Special Offers
1. Effect on net income must be considered when deciding whether to accept or reject an order; reject if
loss results.
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6. If additional volume approaches or exceeds existing available capacity of factory, incremental costs
required to expand capacity may quickly exceed incremental revenue.
7. Accepting order may cause existing sales to decline; the contribution margin lost from the decline in
business is accepted.
III. Decision Analysis⎯Time and Materials Pricing – commonly used to price services. Companies set a price
for labor, materials, overhead and a desired profit margin.
1. Compute the rate in $ per hour of direct labor. Includes charge for other overhead costs.
Financial and Managerial Accounting, 8th Edition
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Chapter 23 Alternate Demo Problem
Modern Company manufactures wood desks. They have the opportunity to buy
handles for the desks at $8 per unit. This purchase would affect costs as follows:
Make Buy
Unit selling price: $340 $340
Decide whether the part should be made or purchased.
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Chapter 23 Alternate Demo Problem: Solution
Buy Make
Revenue $170,000 $170,000
Less:
Variable costs 48,000 47,500