DIFFERENCIAL COST ANALYSIS

CONSUMPTION TAX
• Tax on the purchase, utilization or
consumption of goods or services by
consumers or buyers
CONSUMPTION TAX
• Tax on the purchase, utilization or
consumption of goods or services by
consumers or buyers
CONSUMPTION TAX
• Tax on the purchase, utilization or
consumption of goods or services by
consumers or buyers
CONSUMPTION TAX
• Tax on the purchase, utilization or
consumption of goods or services by
consumers or buyers
CONSUMPTION TAX
• Tax on the purchase, utilization or
consumption of goods or services by
consumers or buyers
MANAGERIAL DECISION MAKING  Identify alternative courses of action. (Should
we buy new equipment or continue using the old
 Define the decision task and goal equipment.)
  Collect relevant information and evaluate o Nonfinancial information is also relevant. It
each alternative. includes information on environmental
 Select the preferred course of action. effects, political sensitivities, and social
 Evaluate or assess the decision made. responsibility. (looks more on what can affect
decisions that are not quantitative in nature )
MANAGERIAL DECISION MAKING
o Both managerial and financial accounting
information provide useful information to
facilitate managerial decision -making. RELEVANT COSTS IN DECISION MAKING
(Managerial think outside the box while financial
accounting provides formal and definite information o Historical financial information are important
about operation entity) and useful in product pricing, and control of
o The entity’s accounting system will primarily business activities. (Nakikita natin yung trends and
be able to provide financial information. we are being given information about custom
production)
These financial information include
However, these past financial data may
performance reports and budget analyses
lead, at a certain level, to incorrect
useful for decision making. (Managerial DM is
not only important to look on financial information it is decisions in some cases.
also important to look on nonfinancial information)
 o In decision-making, it will be useful instead to o Depreciation in relation with the original cost
use relevant costs - a cost that only relates to of plant assets are also sunk costs since they
a specific management decision. were already incurred as a result of asset
usage and irrelevant as well in decision-
making.

Out-of-pocket costs are items that require a future

WHAT MUST BE CONSIDERED? WHAT MUST outlay of cash. It is relevant for current and future
NOT? decision-making since it spells out the amount of cash
outlay needed for every decision. (if you have it, it will
Sunk costs arise from a past decision or transaction require a future outlay of cash – maglalabas ng pera)
that cannot be avoided or changed anymore since they
were already incurred or spent for. Thus, it is o Future intended purchases of equipment will
irrelevant for future decisions. (Whatever happens some involve out-of- pocket costs.
cost will not have effect anymore, hindi na maibabalik) o This purchase cost is relevant in deciding
whether to replace an old equipment
o The purchase price of an old equipment will
not be relevant anymore in deciding whether
to replace it with a new equipment.
 DIFFERENTIAL COST ANALYSIS

The relevant costs in decision-making are the

incremental costs, also known as differential costs.
Opportunity cost is the potential/ forgone benefit lost (kapag hindi siya differential cost, hindi siya relevant kasi
by choosing a specific action when two or more whatever alternative it’s still the same -what is relevant, is what
alternative choices are being decided upon. have difference of those 2 alternatives )

o An entity creating standardized products can Differential costs are the additional costs incurred if a
be offered by a customer of a special order. In company pursues a certain course of action under
deciding whether to accept or reject this different choices or alternatives.
order, not only the profits in taking the special
order should be considered, but also the profit
in giving up a portion of the standard
operations in accommodating the special
order.
RELEVANT BENEFITS Make or buy analysis
The management must also be able to consider the The make-or-buy management decision is a
relevant benefits in choosing an alternative. They are determination scenario on whether an item should be
considered as the incremental revenue from the made internally or bought from an outside supplier.
decision chosen. (choose alternatives that will be much more (San mas makakamura)
beneficial to the company)
o Sometimes, entities have idle capacity. This
o The relevant benefits should exceed relevant idle capacity can be used to consider
costs. manufacturing an item, part, or sub-assembly
o It should be noted, however, that managers they are currently purchasing.
should also look into different qualitative o The management accountant is asked to
factors not easily expressed in costs or compare the cost of manufacturing a part
benefits in choosing an alternative. (a good internally with the cost of purchasing it.
decision is based on both quantitative and qualitative
factors that arethat are combined together in making
decision)
Accept or reject a special order it retained, or add a new one. The entity chooses the
alternative that would be the most profitable for them.
In an accept or reject a special order decision, the
entity is to check whether it will be beneficial for o The entity has to identify the relevant costs in
them to accept a special order at a certain one-time eliminating, retaining, or adding a segment,
special selling price, or just to reject it. The entity department, or product line, and which costs
chooses the alternative that would be more profitable will stay the same in all scenarios (irrelevant
for them. costs).
o The entity has to identify the relevant costs in
accepting the special order.
o The entity also has to consider whether or not
they have excess capacity to accept the special Shutdown or Continue Operations
order, or if some normal operations have to be
dropped to accommodate the special order. In cases of sustained losses or unexpected events, an
entity might consider shutting down operations.
However, the entity should consider whether the
relevant costs of shutting down is greater than just
Eliminate, Retain, or Add
simply continuing. There might be instances that:
In an eliminate, retain, or add decision, the entity is
to check whether it will be beneficial for them to
eliminate a segment, product line, or department, have
 o It is better for the company, or at least a o Entities should be able to properly allocate
segment, to shut down to halt continuous joint product costs in all expected outputs.
losses; or o Joint product costs are manufacturing costs
o It might be better to just continue operating so incurred up to the split-off point. Split-off
that losses will not be as low as it can point is the point where the products are
expectedly be. recognizable already as stand-alone items.

Sales Mix at Limited Resources

An entity that sells different products might see its
own market performance that one product might be
Sell as is or process further
profitable over the other. In a perfect world where
Deciding on whether selling items as is or it needs there are no production constraints, an entity is free to
to be processed further arises on products that produce and sell all of their products. However, when
underwent a single raw material input – as with the resources are limited, the management must identify
case of meat processing companies where ham, bacon, the most profitable sales mix of products.
and meat loaf comes from a common input – pork
o In decisions like these, the entity has to focus
meat. These items are referred to as joint products.
on the contribution margin per unit of scare
resource.
Keep or Replace Equipment
An entity must regularly check whether to keep using
an asset or have it replaced. Advances in technology
might mean newer equipment can operate more
efficiently and at a lower cost than an old equipment

“‘Isaiah 41:10 So do not fear, for I am with you; do not be

dismayed, for I am your God. I will strengthen you and
help you; I will uphold you with my righteous right
hand.”