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Historical costs are irrelevant because they are past costs and, therefore, cannot differ among alternative future courses of action, 11-3 Quantitative factors are outcomes that are measured in numerical terms. Some quantitative factors are financial–that is, they can be easily expressed in monetary terms. Direct materials is an example to a quantitative financial factor. Qualitative factors are outcomes that are difficult to measure accurately in numerical terms. An example is employee morale. 14 Two potential problems that should be avoided in relevant cost analysis are (i) (ii) Do not assume all variable costs are elevate and all fixed costs are irrelevant. Do not use unit- cost data directly. It can mislead decision makers because a. It may include irrelevant costs, and b. Comparisons Of unit costs computed at different output levels lead to erroneous conclusions 11-5 Opportunity cost is the contribution to income that is forgone (rejected) by not using a limited resource in its next-best alternative use. 11-6 No.
Some variable costs may not differ among the alternatives under consideration and, hence, Will be irrelevant, Some fixed costs may differ among the alternatives and, hence, will be relevant. 11-520 Copyright C 2013 Pearson Canada Inc. Chapter II 11-7 No. Managers should aim to get the highest contribution margin per unit of the constraining (that is, scarce, limiting, or critical) factor. The co ingraining factor is what restricts or limits the production or sale of a given product (for example, availability of machine- hours). 11-8 No.
When deciding on the quantity of inventory to buy, managers must consider both the purchase cost per unit and the opportunity cost Of funds invested in the inventory. For example. The purchase cost per unit may be low when the quantity of inventory purchased is large, but the benefit of the I were cost may be more than offset by the high opportunity cost of the funds NV Estes in acquiring and holding inventory. 11-9 No. For example, if the revenues that will be lost exceed the costs that will be saved, the branch or business segment should not be shut down.
Shutting down will only increase the 1055. Allocated costs are always irrelevant to the shut- down decision. 11-10 Cost written off as depreciation is irrelevant when it pertains to costs for equipment already purchased. But the purchase cost of new equipment to be acquired in the future that will later be written off as depreciation is relevant_ II-II NO. Managers tend to favor the alternative that makes their performance look best, so they focus on the measures used in the performance-evaluation model.
If the performance-evaluation model does not emphasize maximizing operating income or minimizing coos TTS, managers Will most likely not choose the alternative that maximizes operating income or minimizes costs. 11-12 No. Relevant costs are defined as those expected future costs that differ among alternative courses of action being considered. Thus, future costs that do not differ among the alternatives are irrelevant to deciding which alternative to choose. Copyright @ 2013 Pearson Canada Inc. 11-521 Instructor’s Solutions Manual for Cost Accounting, ice EXERCISES 11-13 (10 min. Terminology. A full absorption cost refers to all manufacturing costs including all MOM where ease full product costs refers to all period or non-manufacturing costs as well as all manufacturing costs to bring the product to point of sale. The pop routine’ cost is the value lost because a different alternative was not chosen. The incremental revenue and incremental cost are the unique inflows and outflows arising from a specific alternative, should it be chosen. Similarly an o TLA cost arises from implementation of a specific alternative.
In comparison a differential cost is the savings or added costs that arise when comparing alternatives to the current state. At some point the choice must be made and frequently a management team can suffer paralysis by analysis because they seek more and more information, There are some costs that are always irrelevant and one category is sunk costs that have already been spent and cannot be recovered by making a different decision. One way to select an alternative is to use an optimization technique called linear programming.
Optimization under specific constraints on resources may target either in cost minimization or profit minimization. The technical name to calculate What Will be optimized is the objective function. II- 14 (20 min. ) Disposal of assets. 1. This is an unfortunate situation, yet the 588,000 costs are irrelevant regarding the decision to remaining or scar AP. The only relevant factors are the future revenues and future costs. By ignoring the accumulated costs and deciding on the basis Of expected future costs, operating income will be maximized losses minimized).
The difference in favor Of remaining is $3,300: (a) (b) Remaining Scrap Future revenues $38,500 SO,200 Deduct future costs 33,000 operating income $5,500 $2,200 Difference in favor of remaining $3,300 1 1-522 11-14 (cont’d) New truck Deduct current disposal price of existing truck Rebuild existing truck Difference in favor Of rebuilding Note here t hat the current disposal price of $1 1 ,OHO is relevant, but the original cost (or book value, if the truck were not brand new) is irrelevant.
II-IS (10 min. ) Inventory decision, opportunity costs. 1. Unit cost, orders of 20,000 59. 00 Unit cost, order of 240,000 (0. 96 $9. 00) 58. 64 Alternatives under consideration: (a) Buy 240,000 units at start of year. (b) ay,CO units at start of each month. B Average investment in inventory: (a) (240,000 D $8. 64) -2-2 $1, 036,800 $9. 00) 42 90,000 Difference in average investment s 946,800 Opportunity cost of interest forgone from 240,CO unit purchase at start of year = $946,800 0. 0 = $94,680 2. No. The $94,680 is an opportunity cost rather than an incremental or outlay cost. No actual transaction records the $94,680 as an entry in the accounting system. $101,200 $7,700 (b) (a) Replace $112,200 11,000 Rebuild 593,500 $93, SO This too is an unfortunate situation. But the $110,000 original cost is irrelevant to this decision. The difference in favor of rebuilding is $7,700: 11-523 11-15 (cont’d) 3.
The following table presents the two alternatives: Alternative A: Alternative a: Purchase Purchase 240,000 20,000 spark plugs at spark plugs beginning of at beginning year of each month Difference (1) (2) Annual purchase-order costs $ 200 (1 C $200: 12 0 $200) $ 2,400 S (2,200) Annual purchase (incremental) costs (86,400) (240,000 0 $9) Annual interest income that could be earned if investment in inventory were invested (opportunity cost) (10% $90,000) 03,680 9,000 34,680 Relevant costs 52177,480 $6,080 Column (3) indicates that purchasing 20,000 spark plugs at the beginning of EAI chi month is preferred relative to purchasing 240,000 spark plugs at the beginning of the year because the opportunity cost of holding larger invention ray exceeds the lower purchasing and ordering costs. If other incremental benefits Of holding lower inventory such as lower insurance, materials handling, storage, obsolescence, and breakage costs were considered, the costs under Alternative A would have been higher, and Alternative B would be preferred even more. 11-524 Copyright 2013 Pearson Canada Inc. Chapter 11 11-16 (20 min. ) Relevant and irrelevant costs. Relevant costs Variable costs Avoidable fixed costs purchase price unit relevant cost Dalton Computers should reject Peach’s offer.
The $30 of fixed costs are irrelevant because they will be incurred regardless of this decision. When comparing relevant costs between the choices, Peach’s offer price is higher than the cost to continue to produce, 2. Cash operating costs (4 years) Current disposal value of old machine Cost of new machine Total relevant costs AP Manufacturing should replace the old machine. The cost savings are far greater than the cost to purchase the new machine. Difference $80,000 532,000 (2,500) 2,500 $80,000 $53,500 $26,500 Make $180 20 $200 Buy 11-525 Instructors Solutions Manual for Cost Accounting, ice II-17 (10 min. ) The careening personal computer. Considered alone, book value is irrelevant as measure of 1055 when equipment is destroyed.
The measure of the e loss is replacement cost or some computation of the Keep Replace 8,000 (8,000) $210 $210 present value of future services lost because of equipment loss or damage. In the specific case described, the following observations may be apt: Lully amortized item probably is relatively old. Chances are that the loss from this equipment is less than the loss for a partially amortized item because the replacement cost of an old item would be far sees than that for a nearly new item. The loss Of an Old item, assuming replacement is necessary, automatically accelerates the t miming Of replacement. Thus, if the Old item were to be junked and replaced tomorrow, no economic loss would be evident. However, if the old item were supposed to last five more years, replacement is accelerated five years.
The best practical measure of such a loss probably would be the cost of memorable used equipment that had five years of remaining useful life. The fact that the computer was fully amortized also means the accounting reports will not be affected by the accident. If accounting reports are used to evaluate the office man germ”s performance, the manager will prefer any accidents to be on fully amortized units. 11-526 11-18 (25030 min. ) Closing and opening stores. I. Solution Exhibit II 18, Column 1, presents the relevant loss in revenues and the relevant savings in costs from closing the Surrey store. Lopez is correct that Sanchez Corporation’s operating income would increase by SO,OHO it closes own the Surrey store.
Closing down the Surrey store results in a loss Of revenues of $860,000 but cost savings of $867,000 (from cost of goods sold, rent, labor, utilities, and corporate costs). Not e that by closing down the Surrey store, Sanchez Corporation will save none of the equipment-related costs because this is a past cost. Also note that the relevant corporate overhead costs are the actual corporate overhead costs $44,000 that Sanchez expects to save by closing the Surrey store, The corporate overhead of 940,000 allocated to the Surrey store is irrelevant to the analysis. Solution Exhibit 11 8, Column 2, presents the relevant revenues and relevant costs of pop engine another store like the Surrey store.
Lopez is correct that opening such a store would increase Sanchez Corporation’s operating income by $11 ,OHO. Incremental revenues of $860,000 exceed the incremental costs of $849,000 (fro m higher cost of goods sold, rent, labor, utilities, and some additional corporate costs). Note that the cost of equipment written off as depreciation is relevant because it is an expected future cost that Sanchez will incur only if it opens the new store. Also note that the relevant corporate overhead costs are the $4,000 of actual corporate overhead costs that Sanchez expects to incur as a result Of opening the new store. Sanchez may, in fact, allocate more than $4,000 of corporate overhead to the new store but this allocation is irrelevant to the analysis.