22107 Lecture 11: Relevant Costing and Long Term Decision Making
UTS 2014 – Accounting for Business Decisions A
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CASH DISBURSEMENTS BUDGET
March
April
May
Total 2nd quarter
Cash outflows from
operating activities
Payments to
suppliers for
materials.
Salaries and
other labour
costs.
Cash outflows from
overhead
expenditures
Cash outflows for
selling and admin
expenses.
Total cash
disbursements
SUMMARY CASH BUDGET
January
February
March
1st Quarter
Beginning cash
balance
Cash flows from
operating activities
Cash receipts
Cash disbursements
Income taxes
Cash flows from
investing activities
Purchases of
Equipment (given)
Cash flows from
financing activities
Payment of
dividends
Interest on long term
debt
Cash balance before
borrowing
Borrowing from line
of credit
Ending cash balance
LECTURE 11 – RELEVANT COSTING & LONG-TERM DECISION MAKING
LEARNING OBJECTIVES – Relevant costs and product planning decisions
Analyse the pricing of a special order.
Special-order decisions refer to short-run pricing decisions in which management must
decide which sales price is appropriate when customers place orders that are different from
those placed in the regular course of business (onetime sale to a foreign customer, etc.)
UTS 2014 – Accounting for Business Decisions A
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These decisions are affected by whether the company has excess production capacity and
can produce additional units with existing machinery, labour and facilities.
o A special order is rarely accepted if a company does not have excess capacity.
- If a company does not have excess capacity, it will have to turn away current customers in
order to fill a special order – this damages the relationship with these customers.
- Even if a special order is profitable from a quantitative perspective, the impact on customer
relations should be considered before deciding whether to accept or reject the order.
- If customers find other suppliers due to delivery delays, firm’s overall profit might decrease.
- Hence, there may be higher short-term profits but there are qualitative risks.
o Even when a company has excess capacity, qualitative factors must be considered before
deciding to accept a special order, particularly if the special-order price is below the price
offered regular customers.
- In these situations, care must be taken so that regular customers do not feel they have been
treated unfairly.
What are the options?
1. Sell the special order tickets at $125.
2. Sell only the $275 market price tickets.
3. Sell the special order tickets at another price.
UTS 2014 – Accounting for Business Decisions A
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Document Summary
Lecture 11 relevant costing & long-term decision making. Learning objectives relevant costs and product planning decisions. These decisions are affected by whether the company has excess production capacity and can produce additional units with existing machinery, labour and facilities: a special order is rarely accepted if a company does not have excess capacity. If a company does not have excess capacity, it will have to turn away current customers in order to fill a special order this damages the relationship with these customers. Even if a special order is profitable from a quantitative perspective, the impact on customer relations should be considered before deciding whether to accept or reject the order. If customers find other suppliers due to delivery delays, firm"s overall profit might decrease. In these situations, care must be taken so that regular customers do not feel they have been treated unfairly.
