Sunday, December 10, 2006

Management accounting -- Chapter 5

Relevant information -- the predicted future costs and revenues that will do for a mall alternative courses of action
decision model -- any method for making a choice, sometimes requiring elaborate quantitative procedures
avoidable costs -- costs that will not continue to fund ongoing operation is changed or deleted
unavoidable costs -- costs that continue even if a company discontinues in operation
common costs -- those costs of facilities and services that are shared by users
limiting factor (scarce resource) -- the item that restricts or constrains the production or sale of a product or service
inventory turnover -- the number of times the average inventory is sold per year
perfect competition -- a market in which a firm can sell as much of a product as it can produce, all at a single market price
marginal cost -- the additional cost resulting from producing and selling one additional unit
marginal revenue -- the additional revenue resulting from the sale of an additional unit
imperfect competition -- a market in which the price a firm charges for a unit will influence the quantity of units it sells
Price elasticity -- the effect of price changes on sales volume
predatory pricing -- establishing prices so low that they drive competitors out of the market. The predatory price or then has no significant competition and can raise prices dramatically
discriminatory pricing -- charging different prices to different customers for the same product or service
markup -- the amount by which price exceeds cost
full cost (fully allocated cost) -- the total of all manufacturing cost plus the total of all selling and administrative costs
target costing -- a cost management hole for making cost reduction a key focus throughout the life of a product
value engineering -- a cost reduction technique, used primarily during design, that uses information about all value chain functions to satisfy customer needs while reducing costs
kaizen costing -- the Japanese term for continuous improvement during manufacturing

To be relevant to a particular decision, a cost (or revenue) must meet to criteria:
1.it must be unexpected future cost (or revenue)
2.it must have an element of difference among the alternative courses of action.

All managers make business decisions based on some decision process. The best processes help decision-making by focusing the manager's attention on relevant information.
Decisions to accept or reject a special sales order should use the contribution margin technique and focus on the additional revenues and additional costs of the order.
Relevant information also plays an important role in decisions about adding or deleting products, services, or departments. Decisions on whether to delete a department or product line require analysis of the revenues forgone and the costs saved from the deletion.

When production is constrained by limiting resource, the key to obtaining the maximum profit from a given capacity is to obtain the greatest possible contribution to profit per unit of the limiting or scarce resource.
Market conditions, the law, customers, competitors, and costs influence pricing decisions. The degree that management actions can affect price and cost determines the most effective approach to use for pricing and cost management purposes.

Companies used cost plus pricing for product management actions can influence the market price. They can add profit markups to a variety of cost basis including variable manufacturing costs, all variable costs, full manufacturing costs, or all costs. The contribution margin approach to pricing has the advantage of providing detailed cost behavior information that is consistent with cost value profit analysis.

When market conditions are such that management cannot influence prices, companies must focus on cost control and reduction. They use target costing primarily for new products, especially during the design phase of the value chain. They deduct a desired target margin from the market established price to determine the target cost. Cost management and focuses on controlling in reducing costs over the product's life cycle to achieve that target cost.