Cost Allocation and Profit Analysis

Product costs include (1) direct materials costs, (2) direct
labor costs, and (3) manufacturing overhead costs. Direct materials
costs and direct labor costs can be easily traced to products.
Therefore, direct material costs and direct labor costs are assigned to
products. Manufacturing overhead costs, also called indirect costs,
cannot be easily traced to products. Manufacturing overhead costs are
accumulated in cost pools and then allocated to products. Managers need
to know product costs to make planning and control decisions.

Chapter 7 Learning Objectives

1.Assign direct costs and allocate indirect costs using predetermined
overhead allocation rates with single and multiple allocation bases

2.Explain why companies decentralize and use responsibility accounting

3.Describe the purpose of performance evaluation systems and how the balanced scorecard helps companies evaluate performance

4.Use responsibility reports to evaluate cost, revenue, and profit centers

5.Use return on investment (ROI) and residual income (RI) to evaluate investment centers

@

When managers make decisions, they focus on information that is
relevant to the decisions. Relevant information is expected future data
that differ among alternatives. Relevant costs are costs that are
relevant to a particular decision. To illustrate, if Smart Touch
Learning were considering purchasing a new delivery truck and were
choosing between two different models, the cost of the trucks, the sales
tax, and the insurance premium costs would all be relevant because
these costs are future costs (after Smart Touch Learning decides which
truck to buy) and differ between alternatives (each truck model has a
different invoice price, sales tax, and insurance premium). These costs
are relevant because they can affect the decision of which truck to
purchase.

The same principle applies to other situations: Only relevant data affect decisions.

Chapter 8 Learning Objectives

1.Identify information that is relevant for making short-term decisions

2.Make regular and special pricing decisions

3.Make decisions about dropping a product, product mix, and sales mix

4.Make outsourcing and processing further decisions

@

The focus of this chapter is on how companies make capital investment
decisions. The process of making capital investment decisions is often
referred to as capital budgeting, which is planning for investments in
long-term assets in a way that returns the most profitability to the
company. Capital budgeting is critical to the business because these
investments affect operations for many years and usually require large
sums of cash.

Previously, when you learned how to complete the master budget, we
discussed the budgeting objectives: to develop strategy, plan, act, and
control. The same objectives apply to capital budgeting, but the
planning process is more involved due to the long-term nature of the
assets.

Chapter 9 Learning Objectives

1.Describe the importance of capital investments and the capital budgeting process

2.Use the payback and the accounting rate of return methods to make capital investment decisions

3.Use the time value of money to compute the present values of lump sums and annuities

4.Use discounted cash flow methods to make capital investment decisions