Module 11 Costs for Decision Making Omar ElKheshen – omar@arabacademy.com Learning Objectives By the end of this module you should understand: 1. The distinction between full and variable costing 2. The impact on reported profit between the two cost systems 3. The concept of relevant cost for special decisions 4. The analytical framework surrounding relevant costs 5. The application of relevant costs to: − the make or buy decision − opportunity cost − sunk cost − the special sales order − further processing Omar ElKheshen – omar@arabacademy.com 2 Agenda 11.1 Introduction 11.2 The Dilemma of the Denominator 11.3 Managerial Implications of Absorption versus Variable Costing 11.4 Cost Information for Management Decisions 11.5 Routine and Non-Routine Decisions 11.6 Developing an Analytical Framework 11.7 Finding the Relevant Costs 11.8 The Pitfalls of Full Costing 11.9 Opportunity Costs 11.10 Department versus Company 11.11 Sunk Costs 11.12 Management Decisions in Action 11.13 Closing Down a Unit 11.14 The Special Sales Order 11.15 Should we Process Further? Review Questions Case Studies Omar ElKheshen – omar@arabacademy.com In module 9, we’ve covered the behavior of different types of cost; where costs are broken down into variable and fixed costs Variable Costs Fixed Costs Costs that change in magnitude with production or sales levels Costs that do NOT change as production or sales move up or down provide: Useful Managerial Information e.g. break-even points & the impact on profit of changing sales mixes Omar ElKheshen – omar@arabacademy.com Module 10 described various procedures for spreading those costs using plantwide and departmental overhead rates Departmental Rates Plantwide Rates based on: Predetermined Overhead Rate Budgeted overhead for accounting period Budgeted Production Units expressed in: either or Units produced Appropriate activity bases To determine the cost per unit of production or service This calculation is required