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Managerial Accounting Ch10 by Needles, Chapter Outline

Managerial Accounting Ch10 by Needles, Chapter Outline

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10/24/2012

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CHAPTER 10
Short-Run Decision Analysis
REVIEWING THE CHAPTER
Objective 1: Describe how managers make short-run decisions.
10.
Short-run decision analysis
is the systematic examination of any decision whose effects will befelt over the course of the next year. To perform this type of analysis, managers need bothhistorical and estimated quantitative and qualitative information. The information should berelevant, timely, and presented in a format that is easy to use in decision making.20.Short-run decision analysis is an important component of the management process.a0.Analyzing short-run decisions in the planning stage involves discovering a problem or need,identifying alternative courses of action to solve the problem or meet the need, analyzing theeffects of each alternative on business operations, and selecting the best alternative. Short-run decisions should support the company’s strategic plan and tactical objectives and takeinto consideration not only quantitative factors, such as projected costs and revenues, butalso qualitative factors, such as the competition, economic conditions, social issues, productor service quality, and timeliness. b0.In the performing stage, managers make and implement many decisions that affect their organization’s profitability and liquidity in the short run. For example, they may decide tooutsource a product or service, accept a special order, or change the sales mix. All thesedecisions affect operations in the current period.c0.When managers evaluate performance, they analyze each decision to determine if it produced the desired results, and, if necessary, they identify and prescribe corrective action.d0.Throughout the year managers prepare reports related to short-run decisions. In addition todeveloping budgets and compiling analyses of data that support their decisions, they issuereports that communicate the effects their decisions had on the organization.
Objective 2: Define
incremental analysis,
and explain how it applies to short-run decision making.
30.
Incremental analysis
(also called
differential analysis
) is a technique that helps managerscompare alternative courses of action by focusing on differences in the projected revenues andcosts. Only data that differ among the alternatives are included in the analysis. A cost that differsamong alternatives is called a
differential
(or 
incremental 
)
cost
.40.The first step in incremental analysis is to eliminate irrelevant revenues and costs—that is, thosethat do not differ among the alternatives. Also eliminated are sunk costs. A
sunk cost
is a cost thatwas incurred because of a previous decision and cannot be recovered through the current decision.Once all irrelevant revenues and costs have been identified, the incremental analysis can be prepared using only projected revenues and expenses that differ for each alternative. Thealternative that results in the highest increase in net income or cost savings is the one thatmanagers generally choose.
 
50.Incremental analysis simplifies the evaluation of a decision and reduces the time needed to choosethe best course of action. However, it is only one input to the final decision. Managers also needto consider other issues, such as
opportunity costs,
which are the benefits forfeited or lost whenone alternative is chosen over another.
Objective 3: Perform incremental analysis for outsourcing decisions.
60.
Outsourcing
is the use of suppliers outside the organization to perform services or produce goodsthat could be performed or produced internally.
Make-or-buy decisions
are decisions aboutwhether to make a part internally or to buy it from an external supplier. Such decisions may also be concerned with the outsourcing of operating activities.70.To focus their resources on their core competencies (i.e., the activities they perform best), manycompanies outsource nonvalue-adding activities, especially those that involve relatively lowlevels of skill (such as payroll processing or storage and distribution) or highly specializedknowledge (such as information management).80.Incremental analysis of the costs and revenues of outsourcing a product or service as opposed to producing or performing it internally helps managers identify the best alternative.
Objective 4: Perform incremental analysis for special order decisions.
90.
Special order decisions
are decisions about whether to accept or reject special orders at prices below the normal market prices. A special order should be accepted only if it maximizes operatingincome. Like all short-run decisions, a special order decision should support the organization’sstrategic plan and tactical objectives and be based on the relevant costs and revenues, as well asqualitative factors.100.One approach to analyzing a special order decision is to compare its price with the costs of  producing, packaging, and shipping the order to see if a profit can be generated. Another approachis to prepare a bid price by calculating the minimum selling price for the special order; the bid price equals the relevant costs plus an estimated profit.110.Qualitative factors that can influence a special order decision are the special order’s impact onsales to regular customers, its potential to lead the company into new sales areas, and thecustomer’s ability to maintain an ongoing relationship with the company that includes goodordering and paying practices.
Objective 5: Perform incremental analysis for segment profitability decisions.
120.The objective of analyzing a decision about segment profitability is to identify segments that havea negative segment margin. A
segment margin
is a segment’s sales revenue minus its direct costs(direct variable costs and direct fixed costs traceable to the segment). These direct costs are
avoidable costs
 because if management decides to drop the segment, they will be eliminated; because they vary among segments, they are relevant to the decision. If a segment has a positivesegment margin (i.e., if the segment’s revenue is greater than its direct costs), the segment should be kept. If a segment has a negative segment margin (i.e., if its revenue is less than its directcosts), it should be dropped. Certain costs will occur regardless of the decision; because thesecosts are unavoidable and are common to all alternatives, they are excluded from the calculationof the segment margin.130.An analysis of segment profitability includes the preparation of a segmented income statementusing variable costing to identify variable and fixed costs.

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