Gíao trình kế toán bằng tiếng anh ch07

Chapter Incremental Analysis Learning Objectives After studying this chapter, you should be able to: [1] Identify the steps in management’s decision-making process [2] Describe the concept of incremental analysis [3] Identify the relevant costs in accepting an order at a special price [4] Identify the relevant costs in a make-or-buy decision [5] Identify the relevant costs in determining whether to sell or process materials further [6] Identify the relevant costs to be considered in repairing, retaining, or replacing equipment [7] Identify the relevant costs in deciding whether to eliminate an unprofitable segment or product 7-1 Preview of Chapter Managerial Accounting Sixth Edition Weygandt Kimmel Kieso 7-2 Management’s Decision-Making Process Making decisions is an important management function  Does not always follow a set pattern  Decisions vary in scope, urgency, and importance  Steps usually involved in process include: Illustration 7-1 7-3 LO Identify the steps in management’s decision-making process Management’s Decision-Making Process In making business decisions,  Considers both financial and non-financial information  Financial information  7-4 ► Revenues and costs, and ► Effect on overall profitability Non-financial information ► Effect on employee turnover ► The environment ► Overall company image LO Identify the steps in management’s decision-making process Management’s Decision-Making Process Incremental Analysis Approach 7-5  Decisions involve a choice among alternative actions  Process used to identify the financial data that change under alternative courses of action ► Both costs and revenues may vary or ► Only revenues may vary or ► Only costs may vary LO Describe the concept of incremental analysis Management’s Decision-Making Process How Incremental Analysis Works 7-6 Illustration 7-2  Incremental revenue is $15,000 less under Alternative B  Incremental cost savings of $20,000 is realized  Alternative B produces $5,000 more net income LO Describe the concept of incremental analysis Management’s Decision-Making Process How Incremental Analysis Works Important concepts used in incremental analysis: 7-7  Relevant cost  Opportunity cost  Sunk cost LO Describe the concept of incremental analysis Management’s Decision-Making Process How Incremental Analysis Works 7-8  Sometimes involves changes that seem contrary to intuition  Variable costs sometimes not change under alternatives  Fixed costs sometimes change between alternatives  Incremental analysis not the same as CVP analysis LO Describe the concept of incremental analysis Management’s Decision-Making Process Review Question Incremental analysis is the process of identifying the financial data that a Do not change under alternative courses of action b Change under alternative courses of action c Are mixed under alternative courses of action d None of the above 7-9 LO Describe the concept of incremental analysis 7-10 Types of Incremental Analysis Review Question The decision rule is a sell-or-process-further decision: Process further as long as the incremental revenue from processing exceeds: a Incremental processing costs b Variable processing costs c Fixed processing costs d No correct answer is given 7-33 LO Identify the relevant costs in determining whether to sell or process materials further Types of Incremental Analysis Repair, Retain, or Replace Equipment Illustration: Jeffcoat Company is considering replacing a factory machine with a new machine Jeffcoat Company has a factory machine that originally cost $110,000 It has a balance in Accumulated Depreciation of $70,000, so its book value is $40,000 It has a remaining useful life of four years The company is considering replacing this machine with a new machine A new machine is available that costs $120,000 It is expected to have zero salvage value at the end of its four-year useful life If the new machine is acquired, variable manufacturing costs are expected to decrease from $160,000 to $ , and the old unit could be sold for $5,000 The incremental analysis for the four-year period is as follows 7-34 LO Identify the relevant costs to be considered in repairing, retaining, or replacing equipment Types of Incremental Analysis Repair, Retain, or Replace Equipment Prepare the incremental analysis for the four-year period Illustration 7-15 Retain or Replace? 7-35 LO Identify the relevant costs to be considered in repairing, retaining, or replacing equipment Types of Incremental Analysis Repair, Retain, or Replace Equipment Additional Considerations   7-36 The book value of old machine does not affect the decision ► Book value is a sunk cost ► Costs which cannot be changed by future decisions (sunk cost) are not relevant in incremental analysis However, any trade-in allowance or cash disposal value of the existing asset is relevant LO Identify the relevant costs to be considered in repairing, retaining, or replacing equipment Types of Incremental Analysis Eliminate an Unprofitable Segment 7-37  Key: Focus on Relevant Costs  Consider effect on related product lines  Fixed costs allocated to the unprofitable segment must be absorbed by the other segments  Net income may decrease when an unprofitable segment is eliminated  Decision Rule: Retain the segment unless fixed costs eliminated exceed contribution margin lost LO Identify the relevant costs in deciding whether to eliminate an unprofitable segment or product Types of Incremental Analysis Eliminate an Unprofitable Segment Illustration: Venus Company manufactures three models of tennis rackets: Should Champ  Profitable lines: Pro and Master be eliminated?  Unprofitable line: Champ Illustration 7-16 7-38 LO Identify the relevant costs in deciding whether to eliminate an unprofitable segment or product Types of Incremental Analysis Eliminate an Unprofitable Segment Prepare income data after eliminating Champ product line Assume fixed costs are allocated 2/3 to Pro and 1/3 to Master Illustration 7-17 Total income is decreased by $10,000 7-39 LO Types of Incremental Analysis Eliminate an Unprofitable Segment Incremental analysis of Champ provided the same results: Do Not Eliminate Champ Illustration 7-18 7-40 LO Identify the relevant costs in deciding whether to eliminate an unprofitable segment or product Types of Incremental Analysis Review Question If an unprofitable segment is eliminated: a Net income will always increase b Variable expenses of the eliminated segment will have to be absorbed by other segments c Fixed expenses allocated to the eliminated segment will have to be absorbed by other segments d Net income will always decrease 7-41 LO Identify the relevant costs in deciding whether to eliminate an unprofitable segment or product Lambert, Inc manufactures several types of accessories For the year, the knit hats and scarves line had sales of $400,000, variable expenses of $310,000, and fixed expenses of $120,000 Therefore, the knit hats and scarves line had a net loss of $30,000 If Lambert eliminates the knit hats and scarves line, $20,000 of fixed costs will remain Prepare an analysis showing whether the company should eliminate the knit hats and scarves line 7-42 LO 7-43 Other Considerations in Decision-Making Qualitative Factors 7-44  Potential effects of decision on existing employees and the community  Cost savings that may be obtained from outsourcing or from eliminating a plant should be weighed against these qualitative attributes  Cost of lost morale that might result LO Identify the relevant costs in deciding whether to eliminate an unprofitable segment or product Other Considerations in Decision-Making Relationship of Incremental Analysis and Activity-Based Costing 7-45  Many companies have shifted to activity-based costing (ABC)  The primary reason for using ABC is that it results in a more accurate allocation of overhead  ABC will result in better identification of relevant costs and, therefore, better incremental analysis LO Identify the relevant costs in deciding whether to eliminate an unprofitable segment or product 7-46 Copyright Copyright © 2012 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein 7-47