Chapter 5

Introduction to Management Accounting
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch
Horngren/Sundem/Stratton/Sc
Introduction to Management
Accounting
Chapter 5
Relevant Information for

Decision Making with a Focus
on Pricing Decisions
Learning
Objective 1
The Concept of Relevance

Relevant information depends
on the decision being made.
Decision making is choosing
among several courses of action.
Relevant information is the predicted future costs

and revenues that differ among the alternatives.
The Concept of Relevance

Accountants should use two criteria to
determine whether information is relevant:
1. Information must be an
expected revenue or cost and...
2. it must have an element of
difference among the alternatives.
Learning
Objective 3
Relevance of Alternate Income

Statements
Cordell Company makes and
sells 1,000,000 seat covers.
Total manufacturing cost is
$30,000,000, or $30 per unit.
Direct Material Costs are $14,000,000

Direct-labor costs are $6,000,000
Absorption Approach
Schedule 1: Variable Costs (in thousands of dollars)

Supplies (lubricants, expendable tools, coolants, sandpaper
Materials-handling labor (forklift operators)
Repairs on manufacturing equipment
Power for factory
200
Schedule 2: Fixed Costs
Managers salaries in factory
Factory employee training
180
Factory picnic and holiday party
Factory supervisory salaries
Depreciation, plant and equipment
3,600
Property taxes on plant
300
Insurance on plant
$ 6,000
Total indirect manufacturing costs
$10,000
$ 600
2,800
400
$ 4,000
$ 400
20
1,400
100
Absorption Approach
Schedule 3: Selling Expenses (in thousands of dollars)

Variable
Sales Commission
$1,400
Shipping Expenses for products sold
600
$2,000
Fixed
Advertising
$1,400
Sales salaries
2,000
Other
600
$4,000
Total Selling Expenses
$6,000
Schedule 4: Administrative Expenses
Variable
Some clerical wages
$160
Computer time rented
40
$200
Fixed
Office supplies
200
Other salaries
400
Depreciation on office facilities
200
Public accounting fees
80
Legal fees
200
Other
720
1,800
Total Administrative
expenses
$
2008 Prentice
Hall Business Publishing,
Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch
Absorption Approach
Sales (in thousands of dollars)
Less: Manufacturing costs of good sold
Direct Materials
Direct Labor
Indirect Manufacturing (Schedule 1 plus 2)
30,000
Gross Margin or Gross Profit
Selling expenses (Schedule 3)
Administrative expenses (Schedule 4)
Total selling and administrative expenses
Operating income
$40,000
6,000
$ 14,000
10,000
$ 6,000
2,000
10,000
8,000
$2,000
Contribution Approach
Internal (management accounting) reporting that emphasizes the
distinction between variable and fixed costs for the purpose of
better decision making.
Cordell Company
Contribution Form of the Income Statement
For the Year Ended December 31, 2007 (000)
Sales (1,000,000 units)

Less: Variable expenses
Manufacturing
$24,000
Selling and administrative
2,200
Contribution margin
Less: Fixed expenses
Manufacturing
$ 6,000
5,800
Operating income
$40,000
26,200
$13,800
11,800
$ 2,000
Learning
Objective 4
Special Sales Orders
Cordell Company makes and

sells 1,000,000 seat covers.
Total manufacturing cost is
$30,000,000, or $30 per unit.
Cordell is offered a special order
of $26 per unit for 100,000 units.
Special Sales Order

Accepting the special order:
1. would not affect Cordells regular business.
2. would not raise any antitrust issues.
3. would not affect total fixed costs.
4. would not require additional variable selling and
administrative expenses.
5. would use some otherwise idle manufacturing cap
Special Sales Order
Only variable manufacturing costs are

affected by this particular order, at a rate of
$24 per unit ($24,000,000 1,000,000 units).
All other variable costs and all fixed
costs are unaffected and thus irrelevant.
Special Sales Order

Special order sales price/unit
Increase in manufacturing costs/unit
Additional operating profit/unit
$26
24
$ 2
Based on the preceding analysis,

should Cordell accept the order?
$2 100,000 = $200,000 additional profit
Special Sales Order

Cordell Company
Contribution Form of the Income Statement
For the Year Ended December 31, 2007 (000)
Without
Effect of
special order
special order
1,000,000 units Total
Per Unit
Sales
$40,000,000
$2,600,000
$26
Less: Variable expenses
Manufacturing
$24,000,000
$2,400,000 $24
2,200,000
Total variable expenses
26,200,000 $2,400,000
Contribution margin
$13,800,000
$ 200,000
Less: Fixed expenses
Manufacturing
$ 6,000,000
5,800,000
Total fixed expenses
11,800,000
Operating income
$ 2,000,000
With
special order
1,100,000 un
$42,600,000
$26,400,
2,200,
$28,600,000
$14,000,000
$6,000,000
5,800,
11,800,000
$2,200,000
The End
End of Chapter 5

Chapter 5

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Chapter 5

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Introduction to Management Accounting

Relevant Information for

The Concept of Relevance

Relevant information is the predicted future costs

The Concept of Relevance

Relevance of Alternate Income

Direct Material Costs are $14,000,000

Schedule 1: Variable Costs (in thousands of dollars)

Schedule 3: Selling Expenses (in thousands of dollars)

Sales (1,000,000 units)

Special Sales Orders

Cordell Company makes and

Special Sales Order

5. would use some otherwise idle manufacturing cap

Special Sales Order

Only variable manufacturing costs are

Special Sales Order

Based on the preceding analysis,

$2 100,000 = $200,000 additional profit

Special Sales Order

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