2/24/2015

Expectedfuturecostsandrevenuesthatdiffer
amongalternativecoursesofaction.
Occurinthefuture
Differamongalternativecoursesofaction
Differ among alternative courses of action

IrrelevantCosts
HistoricalCosts
+ SunkCosts coststhathavealreadybeenincurredandcannotbe
alteredoraffectedbyadecision
UnavoidableFixedCosts
+ Ongoingfixedcostwhichcannotbealteredoraffectedbya
particulardecision
i l d ii

2/24/2015

DifferentialIncome(netrelevantincome)
Differenceintotaloperatingincomewhenchoosingbetweentwo
alternatives

DifferentialCosts(netrelevantcosts)
Differential Costs (net relevant costs)
Differenceintotalcostsbetweentwoalternatives

Contributiontoincomethatisforegone
(rejected)bynotusingalimitedresourceinits
nextbestalternativeuse.
Benefitlostbytakingoneactionasopposedto
another.

2/24/2015

Black Oak Company makes and sells oak

boxes for a price of P60 each. Unit costs
based on anticipated monthly sales of 1,000
boxes are as follows:
Direct material cost
Direct labor cost
Variable manufacturing overhead
Variable selling overhead
Fixed costs

P15
12
3
5
2

A chain store has offered to buy 100 boxes

per month at P58 each. To accept this
special order, Black Oak will have to restrict
its sales to regular customers to only 900
boxes per monthly because its production
capacity cannot be expanded in the short
run. However, no variable selling expenses
will be incurred for this special order. If Black
Oak accepts the chain store's offer, will its
profit increase or decrease?

Medford Corporation operates a plant

with a productive capacity to
manufacture 20,000 units of its product
a year. The follow information pertains
to the production costs at capacity:
Variable costs P160
P160,000
000
Fixed costs
240,000

Total costs
P400,000
=========
A supplier has offered to sell 4,000 units
to Medford annually.
annually Assume no change
in the fixed costs. What is the price per
unit that makes Medford indifferent
between the "make" and "buy" options?

AcceptorRejectaSpecial
Order

DecisionRule:
Accept the order when
Accepttheorderwhen
therevenuefromthe
specialorderexceeds
additionalcosts
AdditionalRevenueXXX
Less:AdditionalCostsXXX
AdditionalIncomeXXX

MakeorBuyComponent
Parts

DecisionRule:
Choose the option with
Choosetheoptionwith
thelowerrelevantcost
RelevantMfg.Cost
VariableXXX
FixedXXXXXX
Add:OpportunityCostsXXX
TotalRelevantMfg.CostXXX
Less:CostofBuyingXXX
TotalRelevantCostXXX

2/24/2015

ScooterCompanyproducesthree
productsfromajointprocess
costingP100,000.Thefollowing
informationisavailable:
Units

Coststo
Process
Further

Selling
Priceafter
further
Processing

10,000 P35

P70,000

P40

20,000 P40

P30,000

P45

30,000 P20

P90,000

P25

W
A

Selling
priceat
SplitOff

SellorProcessFurther

DecisionRule:
Process further if
Processfurtherif
additionalrevenuefrom
processingfurtheris
greaterthanfurther
processingcost
AdditionalRevenueXXX
Additional
Revenue
XXX
Less:AdditionalCostsXXX
AdditionalIncomeXXX

Whichproductsshouldbe
processedfurther?

Elk Grove produces three products: A, B, and C.

A machine is used to produce the products. The
contribution margins, sales demands, and time
on the machine (in minutes) are as follows:

A
B
C

Demand
D
d CM

120
P20
80
36
100
50

time on
machine
hi

5
10
15

There are 2400 minutes available on the

machine during the week.
week How many units
should be produced and sold to maximize the
weekly contribution?

ProductEmphasis

DecisionRule:
Identifythelimited
resource and aim for the
resourceandaimforthe
highestcontribution
marginperunitofthe
constrainingfactor.
Perproduct:
SellingPriceperunitXXX
VariableCost
XXX
Contribution margin per unit XXX
ContributionmarginperunitXXX
Dividebylimitedresourcereqt.
perunitofproductxxxxxxxxxxxxx
Contributionmarginperunitof
limitedresource

2/24/2015

ContinueorDiscontinuea
BusinessSegment
Continueoperationsofthesegmentifit
contributestotherecoveryoffixedcostsand
thiscontributionisgreaterthanother
investmentopportunitiesthatwillbemade
availabletothefirmifsuchbusiness
segmentisdiscontinued.
t i di
ti
d

Horngren,FosterandDatar,CostAccounting:A
ManagerialEmphasis,11thEdition(Prentice
Hall)
Louderback,et al.ManagerialAccounting,
(SouthWesternCollegePublishing.)
Echanis,etal.ManagementAccountingand
Control;TextandPhilippineCases,(DCF,etal.)
LectureNotes,Prof.SofiaRico