Relevant Cost (Special order dan constrained resource)

Summary

This video script discusses key concepts in management accounting, focusing on special orders and resource constraints. Special orders are one-time, large orders that may require lower prices. The decision to accept them depends on comparing incremental revenue and cost. The script explains how to calculate contribution margin and net operating income in such scenarios. It also touches on managing constraints, emphasizing the importance of selecting the product mix that maximizes total contribution margin when resources are limited. The video provides practical examples to illustrate these concepts and their application in decision-making.

Takeaways

• 😀 Special orders are one-time, large orders that are not part of regular business operations and often come with a lower price request.
• 😀 The decision to accept or reject a special order is based on analyzing incremental revenue and incremental costs, specifically focusing on variable costs and not fixed costs.
• 😀 When a company has sufficient production capacity, special orders may lead to additional profits, as fixed costs are not affected by the order.
• 😀 In the example provided, ZetIn Corporation calculates that accepting a special order of 3,000 units at $10 each would increase their net operating income by $6,000.
• 😀 The key to analyzing special orders is comparing the incremental revenue (from the special order) to the incremental costs (variable costs associated with the order).
• 😀 Constraint resources refer to situations where limited resources (like machines or processes) prevent a company from meeting demand for all products.
• 😀 When there is a constraint, the company should prioritize products that generate the highest contribution margin per unit of limited resource.
• 😀 In the example, ZetIn Corporation faced a constraint with Machine A1, and after calculating the contribution margin per unit of resource, they found that prioritizing Product 2 was more profitable despite Product 1 having a higher contribution margin per unit.
• 😀 A key factor in deciding between products under a resource constraint is calculating how much contribution margin is generated per minute of resource time.
• 😀 Managing constraint resources requires a balance of maximizing profits through effective resource allocation, ensuring that production is directed towards the most profitable products given the constraints.

Q & A

What is a special order in managerial accounting?

A special order is a one-time order that is not part of the company's regular business operations. Typically, it involves a large quantity, but at a lower price than usual, and it does not affect the company's normal business activities.

How do companies decide whether to accept a special order?

Companies analyze the incremental costs and incremental revenues associated with the special order. If the incremental revenue exceeds the incremental cost, the company should consider accepting the special order.

What is the significance of fixed costs when analyzing a special order?

Fixed costs are not included in the analysis of a special order because it is assumed that fixed costs remain unchanged. The analysis focuses only on variable costs and revenues, as fixed costs do not change with the special order.

How did ZetIn Corporation evaluate the special order offer?

ZetIn Corporation evaluated the special order by comparing the incremental revenue of $30,000 (from 3,000 units at $10 each) with the incremental variable cost of $24,000 (3,000 units at $8 each), resulting in an incremental profit of $6,000.

Why does the special order not affect fixed costs?

The special order does not affect fixed costs because the company has sufficient production capacity. ZetIn Corporation, with a capacity of 10,000 units, was only producing 5,000 units, leaving room for the additional 3,000 units in the special order.

What is the role of resource constraints in production decisions?

Resource constraints, such as limited machine time, affect the production decision-making process. The company must prioritize products based on which maximizes total contribution margin relative to the limited resource.

What is a contribution margin and why is it important in resource allocation?

A contribution margin is the difference between sales revenue and variable costs. It is crucial in resource allocation because it helps the company decide which products to prioritize, especially when resources are limited.

How does N Friend Company evaluate the production of two products under machine time constraints?

N Friend Company evaluates the production of two products by calculating the contribution margin per unit of machine time. For Product 1, it makes $24 per minute, and for Product 2, it makes $30 per minute. Based on this, the company would prioritize producing Product 2 to maximize profit.

Why is Product 2 prioritized over Product 1 despite having a lower contribution margin per unit?

Product 2 is prioritized because, within the constraint of machine time, it generates a higher contribution margin per minute of machine usage. Producing two units of Product 2 in one minute results in $30, compared to $24 for producing one unit of Product 1.

How does the company allocate machine time between Product 1 and Product 2?

The company allocates machine time first to Product 2, which requires 0.5 minutes per unit. With a total machine capacity of 2,400 minutes per week, 1,100 minutes are allocated to Product 2. The remaining 1,300 minutes are allocated to Product 1.