Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed
An illustration of relevance choosing output levels
Download 1.72 Mb. View original pdf
|
| An illustration of relevance choosing output levels This section emphasises that the traditional CM approach is appropriate if (1) costs are either totally fixed or purely variable and (2) the number of output units is the only cost driver. Current management accounting thought has restricted the number of situations to which these assumptions apply. A later section relaxes these assumptions and illustrates an approach that can be used in conjunction with ABC and the hierarchy of costs described in Chapter 11. What is a onetime special order Ask students, What if the customer asks fora special order, but then a year later requests a similar deal What if customer A asks fora special order in January, customer Basks for one in March and customer Casks for one in June The onetime special order concept is more ambiguous than students realise. If the company has chronic excess capacity, it maybe better off downsizing than accepting a series of special orders that do not cover full costs. The CM approach is appropriate in the short run. In the longer term, other more profitable opportunities may arise, so the company should not tie up its resources in marginally profitable products. Also, all costs must be covered in the long run. The company cannot survive by producing products that consistently sell for less than full cost. Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5 th Edition, Instructor’s Manual © Pearson Education Limited 2012 Warn students to be very careful with the total cost per unit that includes fixed costs (FCs) per unit. Managers often misuse total cost per unit data for decisions where FCs are not relevant. Managers may also mistakenly multiply the same total cost per unit by different numbers of units. They may not realise that the total cost per unit changes, as the output level changes because FCs are spread over different numbers of outputs. Telling students that total cost per unit figures are valid only at the assumed output levels may help get the point across. Special orders usually do not incur regular marketing costs because they usually do not go through normal channels. There maybe special fixed (marketing) costs of obtaining the order if there is excess manufacturing OH. However, the special order could increase fixed manufacturing OH if it increases output to a higher relevant range or if it requires special machinery, etc. Fixed manufacturing OH and marketing and distribution costs mayor may not be relevant in special-order decisions, depending on the specific situation. Download 1.72 Mb. Share with your friends:
|