P2C.2 Marginal Analysis

Question 1

Marginal Analysis

Answer 1

1. All about decision making.

2. Provides relevant accounting information for management decision making.

Question 2

Relevant Revenue and Cost Characteristics

Answer 2

1. Future oriented: associated with particular decision to be made
2. Differential or Incremental: incurred as a result of a particular option.

Question 3

Incremental Costs vs. Marginal Costs

Answer 3

1. Incremental: increase in cost from choosing one alternative over another
2. Marginal: additional cost of producing one more unit of a product

Question 4

Differential Cost vs. Avoidable Costs

Answer 4

1. Differential: costs that differ between alternatives

2. Avoidable: costs that will be avoided if particular decision is made

Question 5

Explicit Costs vs. Implicit Costs

Answer 5

1. Explicit: actual or probable cash outflows in the future

2. Implicit: costs that do not represent cash outflows but is included in decision making

Question 6

Sunk Costs

Answer 6

Costs that have already incurred and will neither change future decisions nor be recovered.

Irrelevant because:

1. A past transaction
2. It will neither affect or change future decisions

Example:

1. Historical cost on equipment
2. Joint cost in a sell or process further decision

Question 7

Opportunity Costs

Answer 7

1. Sacrifices made or benefits forgone in choosing an alternative over another.
2. Relevant in decision making

Examples:

1. Alternative use of company’s idle capacity in special order decision
2. Potential investment return of money held in bank.

Question 8

Relevant Cost Application: Scarce Resources Decision

Answer 8

Decision: optimize use of scarce resources by producing item that will maximize profitability

Rule: Prioritize to produce item with highest contribution margin per scarce resource and allocate remaining capacity based on ranking highest to lowest.

Question 9

Relevant Costing Application: Special Order Decision

Answer 9

Decision: Accept or reject a special order

Rule: Accept if the order produces incremental profit; otherwise decline.

Considerations:

1. Is there idle capacity? If so, alternate uses?
2. Will regular sales be affected?

Question 10

Relevant Costing Application: Make or Buy Decision

Answer 10

Decision: Make or Buy (or outsource) an item

Rule: Choose the option with lowest relevant costs; lowest between relevant costs or make and relevant costs to buy.

Question 11

Relevant Costing Application: Continue or Drop a Segment

Answer 11

Decision: Continue or drop a segment

Rule: If the segment margin is positive, then continue operating the segment. Otherwise, drop it.

Question 12

Marginal Cost Formula

Answer 12

= Change in Total Cost / Change in Units Produced

Question 13

Marginal Revenue Formula

Answer 13

= Change in Total Revenue / Change in Units Produced