Differential cost
Any cost that differs between alternatives in a decision-making situation. This term is synonymous with avoidable cost and relevant cost
Joint costs
Costs that are incurred up to the split-off point in a process that produces joint products
Joint products
Two or more products that are produced from a common input
Make or buy decision
A decision concerning whether an item should be produced internally or purchased from an outside supplier
Relaxing (or elevating) the constraint
An action that increases the amount of a constrained resource. Equivalently, an action that increases the capacity of the bottleneck
Relevant cost
A cost that differs between alternatives in a decision. This term is synonymous with avoidable cost and differential cost
Sell or process further decision
A decision as to whether a joint product should be sold at the split-off point or sold after further processing
Special order
A one-time order that is not considered part of the company's normal ongoing business
Split-off point
That point in the manufacturing process where some or all of the joint products can be recognized as individual products
Sunk cost
Any cost that has already been incurred and that cannot be changed by any decision made now or in the future
Vertical integration
The involvement by a company in more than one of the activities in the entire value chain from development through production, distribution, sales, and after-sales service
2 broad categories of costs that are never relevant in decisions
1. Sunk costs
2. Future costs that do not differ between the alternatives
Real (or economic) depreciation
The decline in the resale value of an asset that occurs as a consequence of using it more
Opportunity costs
Economic benefits that are foregone as a result of pursuing some course of action
Constraint
When a limited resource of some type restricts the company's ability to satisfy demand
The correct measure to look at when handling a constraint
Highest contribution margin per unit of the constrained resource
Contribution margin per unit of the constrained resource =
Contribution margin per unit of product / The amount of the constrained resource required to make a unit of that product
6 ways of increasing the capacity of a bottleneck
1. Working overtime
2. Subcontracting
3. Investing in additional machines
4. Shifting workers to the bottleneck
5. Focus business improvement efforts on the bottleneck
6. Reducing defective units
It is profitable to continue processing a joint product after the split-off point as long as...
...the incremental revenue from such processing exceeds the incremental processing cost incurred after the split-off point