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Managerial Accounting: An Introduction To Concepts, Methods, And Uses. Chapter 7 Differential Cost Analysis for Operating Decisions. Maher, Stickney and Weil. Learning Objectives (Slide 1 of 3). Explain the differential principle & know how to identify costs for differential analysis.

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managerial accounting an introduction to concepts methods and uses

Managerial Accounting: An Introduction To Concepts, Methods, And Uses

Chapter 7

Differential Cost Analysis

for Operating Decisions

Maher, Stickney and Weil

learning objectives slide 1 of 3
Learning Objectives (Slide 1 of 3)
  • Explain the differential principle & know how to identify costs for differential analysis.
  • Explain the relation between costs & prices.
  • Explain how to base target costs on target prices.
  • Describe how to use differential analysis to measure customer profitability.
learning objectives slide 2 of 3
Learning Objectives (Slide 2 of 3)
  • Explain why businesses apply differential analysis to product choice decisions.
  • Explain the theory of constraints.
  • Identify the factors underlying make-or- buy decisions.
  • Explain how to identify the costs of producing joint products & the relevant costs for decisions to sell or process further.
learning objectives slide 3 of 3
Learning Objectives (Slide 3 of 3)
  • Explain the use of differential analysis to determine when to add or drop parts of operations
  • Identify the factors of inventory management decisions.
  • Explain how linear programming optimizes the use of scare resources (Appendix 8.1)
  • Identify the use of the economic order quantity model (Appendix 8.2)
differential analysis cont
Differential Analysis Cont.
  • A cost (or revenue) is relevant only if it differs between alternatives under consideration
  • Focus is typically on cash flows because:
    • Cash is the medium of exchange
    • Cash is a common, objective measure of benefits and costs of alternatives
review short run vs long run pricing decisions
Review Short-Run vs. Long-Run Pricing Decisions
  • Time horizon of a decision is important in determining relevant costs in a pricing decision
    • Short-run decisions include pricing for a one-time special order
    • Long-run decisions include pricing a main product in a major market
long run pricing decisions slide 3 of 3
Long-Run Pricing Decisions(Slide 3 of 3)
  • Full cost approach is justified in pricing decisions when:
    • Entering into long-term contracts to supply a product
    • Developing and producing a customized product
    • Initially setting prices, then adjusting for market conditions
customer profitability
Customer Profitability
  • Differential analysis is useful in determining which customers to keep or drop
    • Dropping a customer should result in cost savings in excess of lost revenue
    • Alternative uses of extra capacity available after dropping a customer should be included in the analysis
what are the four general categories of customer costs
What are the four general categories of customer costs?

Customer costs generally consist of the following 4 categories of activities:

ABC provides a better understanding of the cost of these activities

define the following
Define the Following
  • Theory of Constraints
  • Bottleneck
  • Throughput Contribution
define the following26
Define the Following
  • Split-Off Point
  • Joint Costs
  • Additional Processing Costs
slide28
If you have any comments or suggestions concerning this PowerPoint Presentation for Managerial Accounting, An Introduction To Concepts, Methods, And Uses, please contact:
  • Dr. Michael Blue, CFE, CPA, CMA
  • blue@bloomu.edu

Bloomsburg University of Pennsylvania