2023年階段復(fù)習(xí)筆記

Accounting

WWW.17ACCA.CN

Basics

ASSETS=OWNER’SEQUITY+LIABILITIES

Creditorsarealiability.(Youowethem.)=Payables.

Increaseofcreditorsisasourceofcash.

Debtorsareanasset.(Theyoweyou.)=Receivables.

Increaseofdebtorsisaconsumptionofcash.

NetProfit=ChangeinOwner’sEquity.

GrossProfit=SaleslessCostofSales.

MatchingConvention:Profitiscalculatedbymatchingcostswiththerevenuerecognizedduringtheperiod.

AllocationConvention:First,determineallcosts.Second,allocatecoststosales,inventory,etc.

CostConvention:Itemsarevaluedatthehistoricalcostofallinputfactors.

ConservatismConvention:Recognizecostsimmediatelyandrevenueonlywhenitiscertain.

AccrualsConvention:Anobligationfromacreditworthycustomermayberegardedasasale.

CostofRawMaterialsinP/LAccount=OpeningInventory+Purchases–ClosingInventory

ValuationofClosingInventorycanbedonebyFIFO,LIFOorAverageValue.

HighValuationofClosingInventory=HighProfits,becauselowvaluationofmatchedmaterialscost.

Typesofinventory:RawMaterials,Work-In-Progress,FinishedGoods.

Reservesareunallocatedprofits.Reserveswouldbeapartofowner’sequity,exceptforsomereasonarebeingheldbackfromrecognitionassuch.Baddebtreservesareowner’sequityheldforthepurposeofcoveringbaddebtthatmayariseinfutureperiods.

Depreciation

StraightLine:Depreciation=(PurchaseCost–ExpectedResidualValue)/ServiceLife

ReducingBalance:Depreciation=CurrentBookValue*CalculatedRate

CalculatedRate=wheren=yearsofservice,rv=residualvalue,pc=purchasecost.

Consumption:Depreciation=whererhy=runninghoursthisyear,rhl=lifetimerunninghours.

CurrentCostAccounting

FouradjustmentsneedtobemadetoconvertHistoricCost(normal)statementstoCurrentCoststatements.

Adjustment1:FixedAssets&Depreciation

Listassetsatcurrentvalue(usuallyreplacementcost)lesstotalaccumulateddepreciation,adjustedforthenewvalue.Thecurrentcostrevaluationreserveiscreditedthedifference,sothattheprofit&lossaccountdoesnotshowanygainsorlossesforrevaluation,whichisafterallnotprofitfromoperations.

Thedepreciationchargetobeaccountedforthisyearisthedifferencebetweenthenewtotalaccumulateddepreciationdesired,andthetotalaccumulateddepreciationasoflastyear.The“currentconsumption”depreciationiscalculatedpernormalpracticeandreflectedontheprofit&lossstatement.Theremaining“backlog”or“top-up”depreciationisDEBITEDfromthecurrentcostrevaluationreserve,becauseitreflectsalowerstartingbookvalueoftheassetinquestionthanisotherwiseshown.

Adjustment2:CostofSales

Findasuitablepriceindexforthebeginningoftheyear,endoftheyearandaveragethroughtheyear.Convertallpricesfromhistoricdollarstoindex-averagedollarsbydividingbytheindexattherelevanttimeandmultiplyingbytheaverageindex.

Determinecurrentcostofsalesby:(openinginventory+purchases)–closinginventory,allinadjustedcurrentvalues.

CostofSalesAdjustmentisthedifferencebetweenhistoriccostofsalesandcurrentcostofsales.Thisadjustmentisaddedtocostofsales(reducingprofit)andalsoaddedtothecurrentcostrevaluationreserve.

Closinginventoryvaluemustbelistedatthecurrentprices.Adjustclosinginventoryvaluebytheappropriatepriceindex,andaddtheresultingadjustmenttothevaluationonthebalancesheetandalsotothecurrentcostrevaluationreserve.

Adjustment3:MonetaryWorkingCapital

DeterminetheopeningandclosingMWC(debtorsetc.lesscreditorsetc.,butnotincludingcashbecausecashisnotWORKINGcapital).Subtractopeningfromclosingtodeterminethisyear’schangeinMWC.

IsolatethevolumechangecomponentofthechangeinMWCbytakingthedifferenceoftheopeningandclosingvaluesasexpressedincurrentdollars.(ConverttocurrentdollarsusingindexesasintheCostofSalesadjustment.)

Findthepriceincreasecomponentbysubtractingthevolumechangecomponentfromthetotalchangefromstep1.

Deductthepriceincreasecomponentfromoperatingprofitandaddittothecurrentcostrevaluationreserve.

Adjustment4:GearingRatioAdjustment

Determinethegearingratio.Findnetborrowings(loanslesscashbutnotincludingcreditors)andnetoperatingassets(netborrowingsplusowner’sequityplusallreserves).Gearingratioisnetborrowingsdividedbynetoperatingassetsandisusuallyexpressedasapercentage.

Multiplythethreepreviousadjustmentsbythegearingratiotodeterminetheamountwhichshouldbe“backedout”(becauseloanpaymentsarefixedathistoricalpricelevels).

Creditthisamounttooperatingprofitsanddebitthisamountfromthecurrentcostrevaluationreserve.

RatioAnalysis

LiquidityRatios:

CurrentRatio=CurrentAssets/CurrentLiabilities.Measuresabilitytopaybills.Ruleofthumb:2.

QuickRatio=(CurrentAssets–Inventory)/CurrentLiabilities.MeasuresabilitytopaybillsNOW.Ruleofthumb:1.

ProfitabilityRatios:

ProfitMargin=Profitafterinterestandtaxes/Sales.

ReturnonTotalAssets=Profitafterinterestandtaxes/Totalassets.

ReturnonSpecificAssets=Profitafterinterestandtaxes/Inventory.

ReturnonOwner’sEquity=Profitattributabletoparentcompany/Owner’sequity.

ReturnOnInvestment(fromDupontChart)=Profit/SalesxTotalAssetTurnover.

CapitalStructureRatios:

FixedtoCurrentAssetRatio=Fixedassets/Currentassets.Meaninglesswithoutindustryaveragetocompareto.

DebtRatio=Totaldebt/Totalassets.Alsoknownasthegearingorleverageratio.

TimesInterestEarned=(Profitbeforetax+Interestcharges)/Interestcharges.Measuresthecompany’sabilitytoweatherlossofprofitorincreaseininterestrateswithoutdefaultingonloanobligations.

EfficiencyRatios:

InventoryTurnover=Sales/Inventory.Measuresnumberoftimesinventoryisturnedoverduringayear.

AverageCollectionPeriod=Debtors/Salesperday.Calculatestheaveragenumberofdaysadebtorgoesbeforepaying.

FixedAssetsTurnover=Sales/Fixedassets.Measureshowhardassetsareworked.Becarefulaboutassetvaluation.Ifacompanyhasmoreup-to-date(thereforehigher)assetvaluesonthebooks,theirratiowilllookworse.

StockMarketRatios:

EarningsPerShare=Profitaftertax,minorityinterestsandextraordinaryitems/Numberofordinarysharesinissue.

PricetoEarnings=Marketprice/EPS.Measureshowmanyyearsofprofityoumustspendtobuyashare.

DividendYield=Dividendpershare/Marketvaluepershare.Expressedasapercentage.

DividendCover=Netprofitoftheyear/Dividendpayout.Showsthedegreetowhichthedividendisreasonabletopayout.

Off-BalanceSheetTransactions

Companiescanuseavarietyofmeanstocontrolwhatappearsontheirfinancialstatementsforanyoftheobviousreasons.Thisisusuallyillegal,depending.Tacticsare:

Controllednon-subsidiaries–owninglessthan50%ofacompanybutstructuringitinsuchawayastoretainmanagementcontrol,perhapsbyowningallthevotingstockbutalsoissuingnon-votingstock.

Consignmentinventories–arrangingforinventorytobeownedbysomeoneelsesoyoudon’thavetoreportitasanasset.Example:Acardealershipmightnottakepossessionofacaruntilitissold,eventhoughitisobviousthatthecaronthelotisaproductiveassettothedealership.

Debtfactoring–Ifdebts(accountsreceivable)aresoldtoathirdpartyforcollection,theycanbewrittenoffthebooks.However,ifthedealwiththethirdpartyincludesarightofrecourseagainstthecompany,thedebtstoallintentsandpurposesstillbelongtothecompanyandshould(butmightnotbe)reportedassuch.

Acquisitions&Mergers

Goodwillistheamountpaidinatakeoveroverandabovethebookvalueofthecompanybeingbought.Itrepresentshiddenassets,tangibleandintangible,thatthebuyingcompanyiswillingtopayfor.Goodwillcanbewrittenoffimmediatelyatthetimeofpurchase,orcapitalizedoveritsusefullifetime.Itdependsonmanagementattitudesandthenatureofwhatconstitutesthegoodwill.

Brands

Brandsareintangibleassets.Brandsincludenamesandappearances,butalsoincludetechnicalknow-howsuchastherecipeforanitemofconfectioneryorthewatercontentinmaltwhisky.Somecompaniesreporttheirbrandsasassetsonthebalancesheet.Someofthereasonsfordoingthisare:

Smallercompanieswhichdesiretobeleftalonecanusebrandstoincreasetheirbookvalue,makingitmorecostlyforpredatorcompaniestoattempttakeovers;

Aggressivepredatorcompaniescanusebrandassetstodriveuptheirshareprices,reducingthenumberofsharestheymustusetofinanceshare-swaptakeovers;

Highlyleveragedcompaniescanusebrandscanbeusedtoincreasenon-loanassets,reducingtheirapparentdebtratio;

Ifbrandsarelistedasseparateassets,theycanbecapitalizedduringamergerortakeover,reducingtheamountofgoodwillandtheproblemoffiguringouthowtodealwithit.

However,ifyoudoputbrandsonthebalancesheet,youhavetodepreciatethemovertheirexpectedusefullife.Thiswillreduceprofits,whichabrogatessomeoftheadvantagesofputtingthebrandonthebalancesheetinthefirstplace.Itishardtoknowtheusefullifeofabrand.Somecompaniesclaimthatbrandshaveanindefinitelife,butauditorsarenotconvinced.

Valuingabrandisalsodifficult.Twomethodsthataresometimesused:

HistoricCost–allcostsinvolvedindevelopingandmaintainingthebrandarecapitalized.Thismethodclaimstobeobjective,butitisdifficulttoknowifanygivenexpensewasfordevelopingabrandorsimplyforsellingproduct.Inessence,previouslywritten-offcostsarereintroducedascapitalitems.

EarningsMethod–Managementattemptstoattributetheactualearningsofthecompanytospecificbrandsandthenapplyamultipliertothisfigurewhichreflectsthebrandstrengthovertheforeseeablefuture.Thismethodisverysubjectiveandbasedonwildguessesaboutfutureearningspotential.

Research&Development

R&Dexpenditureisusuallywrittenoffintheyearitisincurred.However,somecompaniesclaimthatsincetheyexpecttoderivebenefitinfutureyearsfromtheirR&Dexpenditure,itshouldbecapitalizedanddepreciated.ThisisespeciallytrueofcompanieswhereR&Drepresentsamajorpercentageoftotalexpenditures,forexamplesoftwarecompanies.TheproblemisthatthereareusuallymajortechnicalandcommercialrisksassociatedwithR&D,sotheconservatismprinciplesaysthatitshouldbewrittenoffimmediately.

ManagementAccounting

FinancialAccounting

ManagementAccounting

Backward-looking.Reportsonpastperformance.

Forward-looking.Supportsmanagementdecision-making.

Highlystructuredaroundtheaccountingequation.

Noformalstructure.Designedadhocbyeachcompany.

Accountingprofessionalstandardsapply.

Noexternallyimposedrules.

Compulsorybylaw.

No–butallcompaniesuseitinsomeform.

Strictlymoneyterms.

Mostlymoneyterms,butalsoperhapsquantities,etc.

Reportsonthecompanyasawhole.

Generallyreportsonspecificactivitiesordepartments.

Externalauditorsgooverthebooksfrequently.

Nomandatoryauditing,butsomecompaniesauditinternally.

Itisimportanttorememberthatmanagementaccountingisaservicefunctionthatprovidesinformationrelevanttoadecision,butdoesnotactuallymakethedecision.Otherfactorsbesidescostandmoneyinformationaregenerallyconsideredindecision-making.

CostAccounting

JobCosting:Costsareallocated(apportioned)toindividualfinisheditems.Directcostsareallocatedtotheunitstowhichtheyapply,andoverheadsareallocatedaccordingtosomescheme.

ProcessCosting:Usedwhereidentificationofindividualfinisheditemsisimpossible.Example:Oilrefining.Processcostingcollectsinformationaboutallcostsduringanaccountingperiodanddividesthosecostsbythetotalquantityoutput.

VariableCosts:Costswhichvarydirectlywithoutput,andforwhichifoutputwerezero,costwouldbezero.Example:Rawmaterials.

FixedCosts:Costswhicharethesameregardlessofoutput.Example:Factoryrent.

Semi-VariableCosts:Costswhichvarywithoutput,butnotasdirectlyasvariablecosts.Example:Depreciationoffactorymachinery.Machinerywillwearoutfasterwhileitisbeingused,butitwilllosevalueatsomerateevensittingidle.

Break-EvenPoint:Thesalesquantitywheretotalcostsequaltotalrevenueatagivenprice.Oryoucanplotjustprofitpervolume,particularlyifyouwanttocomparedifferentcoststructures(ie,withorwithoutthebignewmachine).

ContributionMargin=SalesRevenue–VariableCosts

ContributionMarginRatio,akaProfit/VolumeRatio=ContributionMarginPerUnit/SalesRevenue

Break-EvenPoint=FixedCosts/ContributionMarginRatio

Assumptionsunderpinningcost-volume-profitanalysis(break-evenanalysis):

Allcostscanbeidentifiedasvariableandfixed.

Allcostsbehavepreciselyaseithervariableorfixed.

Salespriceperunitisknowninadvanceandremainsconstantwithalloutputvolumes.

Salesmixismaintainedpreciselyasvolumechanges.

Allproductionissold.

DirectCosts,akaTraceableCosts:Costswhichcanbedirectlyidentifiedwithproduction.Strongoverlapwithvariablecostsbutnotpreciselythesamething.

IndirectCosts,akaCommonCosts:Costswhichcannotbedirectlyidentifiedwithproduction.Oftenfixedcosts.

ManufacturingOverhead:Depreciationonfactoryequipment;energycostsforrunningthefactory;salariesofforemen,supervisors,QAinspectors.

Non-ManufacturingOverhead:Depreciationonofficeequipment;computersandmotorvehicles;buildingrent;salariesofofficeandsalesstaffandgeneralmanagement.

ProductCosts:Costswhichcanbeattachedtoproductionitemswithoutunduedifficulty.Productcostscontainamixtureoffixed,variable,directandindirectcosts.

PeriodCosts:Costswhicharebesttreatedintimeperiods.Again,periodcostscontainamixtureoffixed,variable,directandindirectcosts.

Controllable&Non-ControllableCosts:Referstowhethermanagementhastheabilitytochoosewhetherornottoincurthecosts.Costscanonlybesaidtobecontrollableornotfromthepointofviewofaparticularmanager.Forexample,thecompany’sinsurancepremiumsarenon-controllablebyashiftsupervisorbutcontrollablebythefinancedirector.Controllabilityisalsoinfluencedbythetime-scaleinvolved.Intheveryshorttermnocostiscontrollablebyanyone.Theconceptofcontrollablecostsisimportantinbudgeting.Managersshouldbeheldtobudgetaryaccountabilityfortheircontrollablecostsonly.

StandardCost:Theengineeredandresearchedcostthatisbudgetedforeachitemofproduction.

ActualCost:Period-by-periodmeasurementoftheactualexpenditureforeachitemofproduction.

EngineeredCosts:Costswhichareunavoidableifthecompanywantstocontinueproduction.Example:Rawmaterialsforagivenproductdesign.Thereisnowaytoavoidacertainamountofsteelifyouwanttobuildacar.

DiscretionaryCosts:Costswhichneednotbeincurredeveryaccountingperiodatthelevelmanagementhascometoexpect.Examples:Administrativesupport,R&D,machinemaintenance.

Bewaretheunitizingoffixedcosts.Iffixedcostsare$20,000andvariablecostsare$100perunit,thenasquantitymovesfrom100to200,variablecostsperunitremain$100butfixedcostsperunitchangesfrom$200to$100.Makingdecisionsbasedonafixedcostperunitisdeceptiveifquantitycanchange.

Todeterminehowtoallocateresources,determinethelimitingfactorandthencalculatecontributionperlimitingfactor.

JobCosting

PlantwideOverheadRate=BudgetedTotalOverhead/BudgetedProductionQuantity(singleproductfirm)

Multi-productfirmsrequirean“activitybase”likedirectlaborcostormachinehours.Thisisthenusedasthedenominatortogetacompany-wideoverheadrate.Attheendoftheyear,mostlikelytheactualtotaloverheadandactualproductionquantitywillbedifferent.Theamountbywhichtheactualoverheadsdifferfromthetotalallocatedoverheadswillbecreditedordebiteddirectlytotheprofit&lossaccount.

DepartmentalOverheadRate=variousdifferentoverheadamountsandactivitybasesforthevariousdifferentdepartments.Machinecalibrationmightusemachinehoursasanactivitybase.Personnelmightusetotalheadcount.Butsomemethodmustbeappliedtoallocatethesevariousoverheadstocostitems(production).

DirectMethod.Manufacturingdepartmentsareeachallocatedashareofsupportdepartmentoverheads,bytheirpercentageconsumptionofactivitybases.Forexample,ifmachininghas75employeesandfabricationhas25,then$50,000ofbudgetedpersonneloverheadwillbeallocatedas$37,500tomachiningand$12,500tofabrication.Oncethisisdone,thetotalbudgetedoverheadtobedealtwithbyeachmanufacturingdepartmentswillbeknown.Inordertoallocatethistoactualcostitems,themanufacturingdepartmentswillalsobegivenactivitybases.Soifmachininghasatotalof$125,000overheadallocated,andisbudgetedtouse2500machine-hours,machiningwillbeassigneda$50/machine-houroverheadrate.

StepMethod.Thestepmethodrecognizesthatsupportdepartmentsprovideservicestoothersupportdepartmentsaswellastoproduction.Thefirstsupportdepartment’soverheadisallocatedtoallotherdepartments,etc.,untilonlymanufacturingdepartmentsareleft.Theorderinwhichdepartments’costsareallocatedcouldbedecreasingorderoftotaloverhead,decreasingorderofpercentageofservicesrenderedtoothersupportdepartments,orsomeotherscheme.Whendetermininganysupportdepartment’sactivitybase,ignorethatdepartment’sconsumptionofitsownresources.IE,iftotalcompanyheadcountis200,butpersonnel(whichgoesfirst)has10staff,thetotalactivitybaseis190.Thesecondandsubsequentservicedepartmentsmustallocatenotonlytheiroriginaloverhead,butalsotheirshareofoverheadfromearlierallocations.

JointProducts&By-Products

Ajointproductistwoormoreproductswhichmustappeartogetherduringtheprocessofproduction.Ifmanagementhastheoptionofnotallowingthesecondproducttoappear,itisnotconsideredajointproduct.By-productsarejointproductswherethesecondaryproductisconsideredundesirableorlow-valuecomparedtothemainproduct.

Jointproductspresentaproblem:Howshouldcostsbeallocatedbetweenthetwo(ormore)products?Somemethods:

EqualShares:Allcostsaresimplydividedinhalf(orwhatever)andallocatedtoeachindividualproduct.

PhysicalCharacteristics:Costsareallocatedbasedonsomemeasurablequantity,likeweightorvolume.

SalesValueatSplit-Off:Costsareallocatedbasedonthevaluewhichcouldberealizediftheproductsweresoldimmediately,withoutfurtherprocessing,atthesplit-offpoint.

UltimateNetSalesValue:Costsareallocatedbasedonthenetvaluerealizedifthegoodsaresoldafterallfurtherprocessingthatthecompanyplanstoperform.

By-ProductZeroValue:Allcostsareallocatedtothemainproduct,withtheby-productproducedatzerovalue.Ifanyoftheby-productissold,itiscreditedtosales.Anyoftheby-productthatiskeptininventoryislistedonthebalancesheet,butatazerocost.

ProcessCosting

Anequivalentunitofproductionisanassessmentofthedegreeofcompletionofaunitundereachmajorcomponentofcost.Forexample,iffourmillionlitresofpaintareinwork-in-progressinventoryandareconsidered25%finished,work-in-progressisvaluedasonemillionlitresofequivalentunits.Equivalentunitscanbeassessedforeachmajorcostcategory(rawmaterials,labor).Thepurposeistoassignanumberofequivalentunitstoeachaccountingperiodsothatcostscanbeallocatedtoproduction.Theproblemisopeningandclosinginventorythatmaybepartiallycompletedatanygiventime.Foreachcostcategory,sum:1.Effortexpendedthisperiodtocompleteopeninginventory,notcountingwhateverwasdoneinthepreviousperiod.2.Unitsstartedandcompletedduringtheperiod.3.Effortexpendedduringtheperiodonclosinginventory.

Inallocatingdirectcosts,addthebalancesheetvalueofopeninginventorytotheexpenditureduringtheperiodforeachcategory(materials,labor).Dividebytotalequivalentunitstogetcostperequivalentunit.

[MoreprocesscostingstuffinModule10wasskipped]

Absorption&VariableCosting

FullCostingakaAbsorptionCosting:CalculateCostofSalesincludingfixedcostsallocatedtoproduction.Reportnetprofitslessother,unallocatedexpenses.Fixedcostsarebundledintothecostofsalesfigure.

VariableCostingakaDirectCosting:CalculateContributionMarginbysubtractingVariableCostofSalesfromrevenue.Thensubtractfixedcostsasalumpsum.Onlyvariablecostsareallocatedtoproduction;fixedcostsarelistedseparately.

DenominatorVolumeVariance.Underabsorptioncosting,fixedcostsareallocatedbasedonoverheadratesthatusethebudgetedproductionquantityasadenominator.Unlesstheactualproductionquantityexactlyequalsthebudgetedproductionquantity,toomuchortoolittlefixedcostwillbereported.Attheendoftheyear,theactualproductionquantityandactualfixedcostsareknown.Thedenominatorvolumevarianceistheactualfixedcostslesstheamountoffixedcoststhatwereallocatedtoproductioninthecostofsalesfigure.Inotherwords,thedenominatorvolumevarianceisanadjustmentsothatthecorrectamountoffixedcostswillappearontheprofitandlossstatement.

Absorptionandvariablecostingcanalsoproducedifferentprofitfigures.Ifunitsareeitherdrawnfromoraddedtoinventory(iewhensalesdoesnotequalactualproduction),thetwocostingsystemswillassignadifferentvaluetotheopeningandclosinginventories.Variablecostingplacesitemsintoinventoryattheirvariablecostonly.Absorptioncostingplacesitemsintoinventorybearingtheirshareofoverheadcosts.Example:Assumeopeninginventoryiszero.10,000itemsareproducedbutonly9,000aresold.Thevariablecostofeachitemis$50andfixedcostsare$200,000.Variablecostingwillshowaclosinginventoryvalueof$50,000.However,absorptioncostingaddsa$20shareofoverheadtothevalueofeachitem.Asaresult,absorptioncostingwillshowaclosinginventoryvalueof$70,000.Absorptioncostingmustthereforealsoshowacostofsalesfigurethatis$20,000lessthanthatshownundervariablecosting,hence$20,000moreprofit.Thereversesituation,whereitemsaredrawnfrominventoryandmorearesoldthanproduced,willresultinlowerprofitunderabsorptioncosting.

Decision-Making

Definetheproblemandlistallfeasiblealternatives.

Costthealternatives.Therelevantcoststoconsideraresolelythosethatdifferbetweenthealternativesunderreview.

Assessthequalitativefactors.Mostdecisionsinvolvemorethanjustconsideringtheaccountingnumbers.

Makethedecision.

Itisessentialthatacompany-wideviewpointistakenratherthanadepartmentalone.

Againbewaretheunitizingoffixedcosts.Fullcostfigurescanbedeceptivebecausethetemptationistovarythemwithproduction.IEifweplantomake1,000widgetsandtheirmanufacturingcostisshownas$50each,itistemptingtoassumethatifweonlymake800,thetotalcostwillnowbe$40,000.Butifthat$50included$20worthofallocatedoverhead,thentheactualcosttomake800willbe$44,000,andatthenewproductionlevelthecostperunitwillnowbe$55.Whenunitized,variablecostsappearfixedandfixedcostsappearvariable.

Costswhichhavealreadybeenincurredarecalledsunkcostsandshouldbeignoredwhenlookingforrelevantcosts.Sincethecosthasalreadybeenincurred,andthisfactcannotbechanged,thecostwillnotdifferbetweenanypossiblealternativedecisionstobemade.Thereforeitisnotarelevantcost,asperthedefinitioninStepTwoabove.Relevantcostsarealwaysfuturecostsandthereforealwaysinvolvecashflows.Butevenfuturecostsarenotrelevantiftheyareunavoidableacrossallalternativesbeingconsidered.

ClosingDownaUnit

Itisfundamentalthatvariablecostsarekeptseparatefromfixedcostsindecisionsconcerningthesuspensionofactivities.Itisalsotempting,butpotentiallymisleading,toignorefixedcostsasnon-relevant.Fixedcostsmostlikelychangewhenaunitisshutdown.Qualitativefactorsarealsolikelytobeimportant.Itisalsolikelythattherewillbespecialone-timecostsassociatedwithclosingtheunit.

SpecialSalesOrders

Companiesareoftenpresentedwithopportunitiestosellatlowerthannormalprices.Theseordersmightarisebecauseofanunusuallyhighquantity,aperceivedstrategicvalue,etc.Itismisleadingtocomparetheofferedpricetothefullcostofmanufacturing.Iftheofferedpriceishigherthanthevariablecostofmanufacturing,itmakesacontributiontofixedcostsandthereforebenefitsthecompany.Thisisnottosaythatacompanyshouldalwaysacceptofferstobuyatanypriceabovevariablecosts.However,suchanoffershouldnotberejectedoutrightsimplybecauseitishigherthanthefullcostofmanufacturing.Otherfactors,suchasdemandfortheproduct,futurebusinessthatmightresultfromthesale,etc.,mustbeconsideredbeforedecidingtoacceptordenytheorder.

DecisiontoProcessFurther

Usuallyinthecontextofaby-productorjointproduct,acompanymayhavetodecidewhethertosellagivenproductasitstandsorapplyfurtherprocessingtoincreasetheeventualsalesvalue.Theproblemisthatindecidingwhetherornottoapplyadditionalprocessingtooneortheotheroftwojointproducts,themethodofallocatingcostsbetweenthetwoproductscansharplyaffecttheoutcomeofthedecision.Theansweristoignorecoststhatarenotrelevant.Theonlyrelevantcostsaretheadditionalmoneyspentonthefurtherprocessing,andtheadditionalrevenuegeneratedbytheincreaseinsales.

Budgeting

Reasonsforbudgeting:Co-ordination,planning,motivation,control.

Problemswithbudg