decision making model
1. recognize and define the problem
2. identify alternatives as solutions to the problem; eliminate non-feasible ones
3. identify costs and benefits assoc. w each alternative, classify each as relevant/irrelevant, and eliminate irrelevant ones
4. estimate
constraints
the limitations faced by firms in terms of resources and product demand
depreciation
a sunk cost
differential cost
the difference between the summed costs of two alternatives in a decision
irrelevant costs - past and future
not related to the future and/or not differential across alternatives
keep or drop decisions
determine whether a segment, such as a product/service line or geographic sales region, should be kept or dropped
make or buy decisions
those decisions involving a choice btwn internal or external production
opportunity cost
what is lost / what is gained
optimal product mix
the product mix resulting in the most profit for the company
product mix decisions
decisions regarding the relative amount of each product manufactured by a company
qualitative factors
political pressure, product safety, impact of late orders, etc.
relevant costs
2 characteristics: they are future items, and they differ across alternatives
segment
a subunit of a company of sufficient importance to warrant the production of performance reports
segment margin
shown on segmented income statement and is useful in evaluating the performance of segments and IDing info necessary to make keep or drop decisions
sell or process further decisions
a decision as to whether a joint product should be sold at the split-off point or sold after further processing
special order decisions
focus on whether a specially priced order should be accepted or rejected
sunk cost
cost that cannot be affected by any future decision
ex: depreciation
budgeted unit cost
located within the finished goods inventory budget; sum of unit costs of dm, dl, and oh; multiply by total units to get cost of total ending inventory
cash budget
includes cash receipts, disbursements, any excess or deficiency of cash, and financing
cost of goods sold budget
reveals the expected cost of the goods to be sold, using info from dm, dl, oh, and fg budgets
direct labor budget
shows the total direct labor hours and the direct labor cost needed for the number of units in the production budget; determined by relationship btwn labor and output
direct materials purchases budget
tells the amount and cost of raw materials to be purchased in each time period
flexible budget
enables a firm to compute expected costs for a range of activity levels; key is knowledge of fixed and variable costs; 2 types - before and after the fact
master budget
the comprehensive financial plan for the organization as a whole; typically for a 1 year period broken down into quarterly/monthly budgets; divided into operating and financial budgets
operating budget
describe the income-generating activities of a firm: sales, production, and finished goods inventories
financial budget
details the inflows and outflows of cash and the overall financial position
overhead budget
shows the expected cost of all production costs other than direct materials and direct labor; direct labor hours is usually the driver
performance report
compares budgeted data with actual data, accounting for variances as being favorable or unfavorable
production budget
tells how many units must be produced to meet sales needs and to satisfy ending inventory requirements
sales forecast
a prediction of future sales over a specific period of time
selling/admin expense budget
outlines planned expenditures for nonmanufacturing activities; broken down into fixed and variable components
static budget
a projection of budget data at one level of activity
continuous budget
moving 12-month budget that adds months as months expire
causes of variances for materials, labor, overhead
-materials: difference btwn actual and planned prices, or actual and standard quantitites, or both
-labor: difference btwn actual and planned wage rates, actual hours worked, both
voh: prices for individual voh items have changed, waste or inefficiency
fo
favorable variance
occur when actual prices/usage of inputs are less than standard prices/usage
labor variance
measures the difference btwn the actual costs of labor and the costs allowed for the actual level of activity
materials variance
difference btwn the actual cost of materials and the materials cost allowed for the actual level of activity
normal costing system
uses actual costs for direct materials and direct labor, and a budgeted predetermined rate for overhead
overhead variances
difference btwn applied and actual overhead; broken down into 4 components (voh spending, voh efficiency, foh spending, foh volume)
price standards
the price that should be paid per unit of input
price variance
difference btwn the actual and standard unit price of an input multiplied by the number of inputs used
quantitative standards
historical experience, engineering studies, input from operating personnel
standards - ideal vs currently attainable
ideal: demand maximum efficiency and can be achieved only if everything operates perfectly
currently attainable: can be achieved under efficient operating conditions; allowance is made for normal breakdowns, interruptions, less than perfect skill, and so
standard cost sheet
provides the production data needed to calculate the standard unit cost
standard costing system
adopted in order to... -improve planning and control (comparing actual vs budget and variances)
-facilitate product costing (costs are assigned to products using q and p standards for all 3 manufacturing costs)
total budget variance
difference btwn the actual cost of the input and its planned cost
unit standard cost
quantity decision (amount of input per unit of output), and pricing decision (amount to be paid per unit of input to be used)
unfavorable variance
occur whenever actual prices/usage of inputs are greater than standard prices/usage
usage (efficiency) variance
difference btwn the actual and standard quantity of inputs multiplied by the standard unit price of the input
variance investigation
1. cost/benefit analysis
2. are variances significant
3. is variance expected to reoccur?
see if variances are within the acceptable top/bottom range
operating managers
recognize the need to control costs; compare actual and budgeted costs to determine how well the company performed
sources of standards
historical experience, engineering studies, input from operating personnel; each has pros and cons
historical experience
provides an initial guideline for setting standards, but should be used with caution bc it can perpetuate existing inefficiencies
engineering studies
identifies efficient approaches and can provide rigorous guidelines, but often too rigorous
input from operating personnel
since operating personnel are accountable for meeting standards, they should have significant input in setting standards
production manager
accountable for most variances, except for the materials price variance (purchasing agent), and foh spending variance (too many moving parts, variances are not typical)