“NOT FOR SALE.

”
- RAHYNE, CPA

RELEVANT COSTING WITH LINEAR PROGRAMMING  ACCEPT or REJECT

- Bakit pag accept or reject laging special ang order? What makes
SHORT-TERM DECISION MAKING the order special? SELLING PRICE, lowered price or bargained
- Para magkaroon ng decision-making kailangan may dalawang choices. Kaya price will make the order special.
nga, dapat may two alternatives. - Pag bumili sa regular price, always accept regular order.
- Not because binawasan yung presyo kaagad reject. There is such
Sub-Topics (Alternatives) thing as perishable goods.
 Make or Buy - The first thing to do is determine ano-ano ba yung mga relevant
 Accept or Reject costs ang gagastusin kapag inaccommodate yung special order.
Kaya isa-isahin muna yung mga VCs.
 Continue or Shutdown
- Bakit iniignore ang FC as relevant cost? Kasi with or without this
 Sell or Process Further
order, the amount of FC will remain the same.
 Best Product Combination
- The overall objective of these sub-topics ay hindi lalayo sa main goal ng
FORMULA:
management accounting and that is to provide accounting information so
that the management will decide in favor of the action to maximize profit.
To get the PROFIT/ UNIT:
- There are only two ways to maximize profit: Maximize revenue or
Special Order SP XX
minimize cost, or both.
LESS: Relevant Cost/unit XX
- Ang keyword ay maximize kaya wag magbibigay sa company ng 1M profit
PROFIT PER UNIT XX
kung pwede pa namang gawing 10M. Kumbaga, don’t settle for less.
To get the ACTUAL PROFIT:
RELEVANT COSTING (DIFFERENTIAL COSTING, INCREMENTAL
Profit/ unit XX
ANALYSIS, NON-ROUTINE DECISION-MAKING)
X Special Order/ unit XX
- Bakit RELEVANT COSTING?
ACTUAL PROFIT XX
TWO CRITERIA FOR A COST TO BE RELEVANT IN DECISION-MAKING
 Future Cost
- Always watch out if may effect sa Selling Expense yung gagawing
 Different → root word, “differ” - VC vs. FC, ano ang nagdi-differ?
special order e.g., Additional cost for distribution cost or shipping
VC. Kaya may basic rule na sa decision-making, ang VC madalas
cost. Add these sa relevant costs (VC).
relevant at ang FC ay irrelevant. Since VC differs/ varies, relevant.
On the contrary, since FC is assumed to be constant/ the same, From Sir Apepe
kaya madalas irrelevant. INCREMENTAL REVENUE XX
GENERAL RULE: FC is irrelevant. LESS: INCREMENTAL COSTS
EXCEPTION: If FC is avoidable. DM XX
- Relevant = Avoidable: Bakit pasok ang salitang avoidable sa DL XX
future cost? As the word suggests, you can still prevent or avoid VMOH XX
from happening in the future. Ito yung contrast sa sunk costs na VSAE XX
too late na. Baki different din ang avoidable? Because we’re OPPORTUNITY COST XX
talking about alternatives. Sa alternative 1, nandon siya; at kapag ADDITIONAL FC (avoidable) XX (XX)
avoidable siya, sa alternative 2, mawawala siya. Then that IINCREMENTAL PROFIT XX
becomes different between two alternatives.
- If the problem is silent, irrelevant ang FC, since it is assumed  SPECIAL ORDER PRICING
to be constant. - If the minimum SP is based on:
- e.g., (1)If the company does this action 20% of FC will be avoided.  Full Capacity (“Sold Out”): Regular SP
Then, relevant yung 20% na avoidable. (2)If the company does this - If kapag Full Capacity, whatever quantity you can
action 80% of FC will remain. This means that the other 20% will produce, you can sell at the regular price. That’s why
be avoided. ang description ay sold out na.
- Kaya regular SP ang minimum kasi non-negotiable
i.e., Kung nabebenta sa customers ng 45K, ibebenta rin
ng 45K if may special order dahil galing yan sa regular
 MAKE or BUY (outsourcing decision)
customers, ginive-up lang. But remember, baka may
- Ang involved dito ay cost to make or cost to buy; choose the
additional variable selling expense na dapat i-consider
lower cost.
e.g., Shipping Cost.
- In most cases, FC is irrelevant, but relevant if avoidable.
- Consider OPPORTUNITY COST – income (benefit) sacrificed;
 Excess Capacity (“Unsold Units”): Unit VC
the act of forfeiting or foregoing the income is by sacrificing it.
- Kaya Excess, kasi pwedeng i-produce nang wala pang
- Guidelines: In most cases, FC is irrelevant, and consider if there
ready buyer. Maiiba ang minimum SP, babawiin lang
is any opportunity cost.
yung Materials, Labor & VOH. Wag na isama yung FOH
- Opportunity cost – income sacrificed, kaya kapag dineduct na,
kasi its amount will remain the same, with or without this
hindi na siya income sacrificed but income realized.
order. Add also the additional VSAE.
- Kaya sa Make or Buy, add lang nang add. Hindi nag-dededuct.
- Since hindi avoidable ang FC, ang assumption ay constant ang
 Sa accept or reject decision, e.g., If the regular price is 45K &
FC kaya siya madalas irrelevant. If you make & buy, andiyan siya,
special order price is only 40K.
it remains the same; and the same is the exact opposite of different.
- ACCEPT, if you have excess capacity.
Kaya irrelevant.
- REJECT, if you are at full capacity.
- Net advantage – Savings.
- Maximum amount of Purchase Price = Total Relevant Costs
to Make. Pwede ring i-per unit (Relevant Cost to Make ÷  CONTINUE or SHUTDOWN OPERATIONS a business segment,
Demand). For e.g., 27.5K Maximum Purchase Prince at may nag- product line or branch
ooffer na 30K. Will you buy? No, kasi 27.5K lang ang relevant cost
to make, mag-make ka nalang. If mas mababa ang inooffer, then, SALES XX
LESS: VARIABLE EXPENSES (XX)
buy.
CONTRIBUTION MARGIN XX
- Thus, the maximum purchase price you are willing to pay
LESS: TRACEABLE FIXED COST (Direct/ Avoidable)) (XX)
tatapatan lang at the maximum yung relevant cost to make. Pag SEGMENT MARGIN XX
yung inoofer na purchase price, lumagpas na sa cost to make, don LESS: COMMON FIXED COST (Indirect/ Unavoidable) (XX)
nalang sa cost to make option. Kaya the maximum amount you are PROFIT (LOSS) XX
willing to pay is based on the relevant cost to make.
- Bakit may direct at indirect? Sa continue or shutdown decision-
From Sir Apepe making, we are not considering to shutdown the entire company
COST TO MAKE COST TO BUY but only a segment in the company.
AVOIDABLE VC: PURCHASE PRICE - Now, pag magtanggal ng isang segment/ branch, ang mga
- DM MATERIALS HANDLING kasama sa mawawalang FC ay yung traceable at direct sa
- MATERIALS HANDLING segment/ branch. Yung mga common at indirect lang sa segment/
- DL
branch ay hindi mawawala.
- VMOH
- Pag tinanggal ang isang segment/ branch, yung kaniyang
AVOIDABLE FC Allocated Common Costs will just be allocated elsewhere but
OPPORTUNITY COST within the same company.
“NOT FOR SALE.”
- RAHYNE, CPA

- Even if you continue or shutdown, the common fixed expenses ADDITIONAL NOTE: Minimum SP = UVC + Lost UCM
ay ina-allocate lang, means unavoidable siya because it remain the
same. Hindi katulad ng traceable, it differs. If you continue,  SELL or PROCESS FURTHER a product
nandiyan. If you shut it down, mawawala na. Since avoidable, - Joint process – several products are being manufactured
relevant yan. simultaneously. And dahil joint process, may mai-incur na joint
- Bakit maling basis ang loss in deciding whether to continue or costs until it reaches a certain split-off point. Literally to mean
shutdown a segment? Kasi may naconsider na irrelevant magis-split na yung mga magkakadikit na products into separate
item i.e., Common Fixed Expense. Kaya ang tamang basehan products.
kapag nagdecide ay yung mga avoidable lang. - After the split-off point, the company has this option to undergo
- Ang tamang titingnan ay SEGMENT MARGIN – the most relevant further processing, for which it will incur the further processing cost
item. or additional processing cost.
- When you sell vs. process, kailan magdedecide ng sell na ba or
To compute for the NEW PROFIT/ LOSS: process pa? Saan magde-decide? Sa split-off point. Kasi hindi
Segment Margin (of the remaining segment) XX naman pwedeng mag-sell habang nagjo-joint process,
LESS: Common FC (after allocation) XX magkakadikit pa yung products.
NEW PROFIT/ LOSS XX - Kaya kapag sinabing sell, sell at split-off or process, beyond
split-off point.
Alternatively: - Since magde-decide sa split-off point, ano ngayon ang turing sa
Profit, Now (Total Profit of all segments) XX joint costs incurred in the past? Sunk.
LESS: Segment Margin (of the dropped segment) (XX) - Kaya nga sa sell or process, irrelevant ang joint cost, thus
NEW PROFIT/ LOSS XX ignore. Pero sa cost accounting (AFAR), ina-allocate among the
main and by-products. Hindi na yun concern ng MS.
- If the sales decreased, ang nag-decrease ay the unit sales
kaya deretso na sa CM ang adjustment ng pag decrease kasi To compute for the FURTHER PROCESSING COST:
affected din naman ang VCU kapag na-adjust ang unit sales.
- Kapag may percent ng traceable cost na nag-remain, it will be Sales Value at Split-off Point XX
allocated to the remaining segment/s. LESS: Final Sales Value (XX)
FURTHER PROCESSING COST XX
To determine the DECREASE/ INCREASE IN PROFIT:
Profit (New/ Before Shutdown) XX If:
LESS: Profit (Now/ After Shutdown) (XX) - Sales at Split-off Point > Further Processing Cost, SELL
DECREASE/ INCREASE IN PROFIT XX - Sales at Split-off Point < Further Processing Cost, PROCESS
From Sir Apepe
If the question pertains to ALL products:
GUIDELINE 1: Continue if avoidable revenue > avoidable cost.
- Total Sales Value at Split-off Point > Total Further Processing
AVOIDABLE REVENUE AVOIDABLE COSTS Cost, SELL
Sales Revenue Variable Costs - Total Sales Value at Split-off Point < Total Further Processing
Opportunity Costs Traceable Fixed Costs Cost, PROCESS
Avoidable Common Fixed Costs
Other Avoidable Costs From Sir Apepe
REVENUE or SP AFTER PROCESSING FURTHER XX
GUIDELINE 2: Look for the segment margin. LESS: REVENUE or SP at split-off (XX)
- If positive, continue. ADDITIONAL REVENUE XX
- If negative, shutdown. LESS: COST OF PROCESSING FURTHER (XX)
- If no choice but to drop a segment, drop the one with the least INCREMENTAL REVENUE XX
segment margin.
 SCRAP or REWORK
SALES XX - Application of sell or process further.
LESS: VC (XX) - Scrap – like sell at a bargain price; Rework – like process
CM XX further/ modify.
LESS: TRACEABLE FC (relevant) (XX) - Sa rework, may processing or production cost. Dito papasok
SEGMENT MARGIN XX yung materials, labor, and overhead which will be deducted to
LESS: COMMON FC (re-allocated to the the selling price for rework.
remaining segment) (XX) - Choose the higher SP/ Revenue.
NET INCOME XX - Inventory cost is sunk cost, thus irrelevant. Joint cost
counterpart.
 PRODUCT ELIMINATION POINT (SHUTDOWN POINT)
- BEP = FC ÷ UCM  BEST PRODUCT COMBINATION
- What’s the point of computing the BEP? Mula BEP, uulitin lang - Limitation/constraint – available hours (limited hours).
yung formula pero may gagawin sa FC. Hindi mag-aadd ng desired - Compute the most important amount, the CM per hour by
profit kundi magde-deduct ng shutdown cost. dividing the Unit CM & Hours/unit.

To compute the SHUTDOWN POINT: PRODUCT A PRODUCT B PRODUCT C

FC – SD Costs UNIT CM XX XX XX
SDPunits = ÷ HOURS/unit XX XX XX
UCM
CM/hr XX XX XX
- Shutdown cost – Unavoidable cost, kaya dini-deduct sa FC yung
unavoidable SDC ay para maiwan yung avoidable portion na - Pero hindi laging CM/hour ang cinocompute. Pag ang nakalagay
relevant, e.g., Plant Maintenance & Real Property Tax. ay per meter, CM/meter. Basta ang basic rule, kung ano yung
limitation (hr/meter/kg) siya dapat yung denominator.
Remember, - After getting the CM/ hr, ranking from highest to lowest.
- If BEP > SDP = Profit
- If BEP < SDP = Loss PRODUCT A PRODUCT B PRODUCT C
UNIT CM XX XX XX
- Ito yung kailangan ma-justify na, why continue despite having a ÷ HOURS/unit XX XX XX
loss? CM/hr XX XX XX
RANKING 1ST 2ND 3RD
Thus,
- If Expected Sales > SDP, CONTINUE - Rankings are just assumed, it may vary.
- If Expected Sales < SDP, SHUTDOWN - Bakit kailangang naka CM/ hour at naka-rank pa? To avoid
- If Expected Sales = SDP, CONTINUE OR SHUTDOWN allocating the hours to those products na malalakas kumita. Dapat
mag-decide based on the CM per unit of limited resources.
- Kaya if the same, either continue or shutdown. This is the - Market limit – pwedeng magproduce more than the market limit,
indifference point “=”. but you cannot sell more than the market limit.
- Expected Sales – yung result ng computation sa BEPunits.
“NOT FOR SALE.”
- RAHYNE, CPA

To compute for the TOTAL HOURS PER UNIT: - Ang tanong na dapat sagutin dito, how would you come-up with more or
less, maximize combination?
Market limit XX - Sa Material 1 cost function, nabago yung “≤” into “=”, ganon din sa Material
X Hours on Machine XX 2. Kasi the target is to maximize profit, kung gusto ng malaking kita, dapat ma-
TOTAL HOURS PER UNIT XX maximize yung sales. Para ma-maximize yung sales, maximize
production; To maximize production, maximize the use of materials. Sa
- After ranking, proceed to determining the best product makatuwid, hindi lang gagamit ng ≤ 120, but we will exhaust this.
combination. - Ang assumption is this: Kapag walang prinoduce na A, lahat ilalaan sa
Material 1, thus, 24 ang kayang maproduce ng B (120 ÷ 5), kasi 24 X 5, ubos
XX → Limitation (e.g., hours) na yung 120. What if naman lahat ng 120 pounds ng Material 1, ilalaan kay A,
(XX) → 1ST in ranking (units)** X Machine per hr walang iproproduce na B. If B is 0, A is 60 (120 ÷ 2).
XX - A = 0, B = 24 (combo 1); A = 60, B = 0 (combo 2): Why should they be
(XX) → 2nd in ranking (units)** X Machine per hr considered? Are they maximized? Inuubos ba nila lahat ng availabale
XX Remaining Limitation ÷ Machine per hr resources? Yes, lahat ng 120 ubos. (Refer to the illustration above)
(XX) → 3RD in ranking (units)** X Machine per hr - Do the same sa Material 2. Ubusin din yung 80, same process lang.
0 - A = 0, B = 40 (combo 3); A = 20, B = 0 (combo 4).
- Saan malalaman yung huling combination? Sa parehong function.
- To compute for the profit (highest possible profit) associated with Pagsabayin or simultaneous solving sa least square: Either get rid of A to solve
the best product combination, multiply the UCM to the units of each B or get rid of B to solve for A.
product (refer to the ranking) then deduct to FC. - Anong mas madaling i-eliminate? A.
e.g., - Parang sa least square lang na dinidivide muna yung parehong A para
A – XX units** X UCM = XX maging pareho sila at macancel. Then, multiply yung factor sa M1, then,
B – XX units** X UCM = XX deduct the results/ equation to the values of M2.
C – XX units** X UCM = XX - To know the value of A, substitute lang sa M1 equation. Thus, the last combo
TOTAL CM XX is: A = 10, B = 20. (Refer to the illustration above)
LESS: FC XX - Since lahat ng ito maximize combinations, pag nilagay isa-isa sa function
PROFIT XX (Maximize Z = 3A + 4B), magkakaroon ng limang values ng Z.
- But first, test the constraints against each other: Yung kakayahan ba ni
- Paano kung sa isang problem dalawa ang limitation (e.g., hours Material 1, kakayanin ni Material 2 and vice versa.
& meters)? Ito ang problema ng relevant costing, it cannot handle - Si Material 1, kaya niyang magproduce ng 24B, tingnan sa Material 2 kung
many constraints. If maraming constraints, linear programming na kaya rin niya mag-produce ng 24B; 24 X 2 (ito yung 2B ni M2) = 48 lang ang
ang ginagamit. need, meyron 80 si M2, thus, feasible.
- Ang hindi feasible ito: Kung si M1 kaya niyang 60 units of A pero pag si M2,
From Sir Apepe hindi na kaya, kailangan na ng 240 meters, kasi 60 X 4 (4A ni M2) = 240 na.
GUIDELINE: Compute for the CM per constrained resource Kaya ibig sabihin yung 60 units of A, si M1 lang ang kaya, si M2, hindi kaya.
and rank them from highest to lowest. Therefore, impossible to happen, wag na i-consider. Not Feasible or NF, in
other words, impossibleng mangyari kaya wag nang i-substitute pa kay Z.
PRODUCT A PRODUCT B - Another, si M2, kaya niyang gumawa ng 40 units of B, si M1, hindi niya kaya
SELLING PRICE XX XX kasi 40 x 5 (5B ni M1) = 200, kasi hanggang 120 ang kaya.
LESS: VCU (XX) (XX) - Another, kaya bang gumawa ni M1 ng 20 units of A? Kaya, why? 20 x 2 (2A
CMU XX XX
ni M1) = 40 only kasi meyrong 120 pounds.
÷ CONSTRAINED RESOURCE/ UNIT XX XX
- Lastly, A = 10, B = 20, substitute to M1, saktong 120 (2(10) + 5(20)); Sa M2,
e.g., It takes 2 MHrs to produce 1 unit
OR saktong 80 (4(10) + 2(20)). Thus, feasible itong combo na ito.
X # OF UNITS PRODUCED PER XX XX - Sa combo 5, ito lang yung combi na, lahat ng available resources, ubos.
CONSTRAINED RESOURCE - Then, substitute lang yung mga feasible combinations sa objective function.
e.g., 2 units are produced per Mhr. Kaya ang Optimal Product Mix: 10 of A, 20 of B. (ALGEBRAIC METHOD)
CM PER CONSTRAINED RESOURCE XX XX

 LINEAR PROGRAMMING
- It can handle many constraints.
- Para madetermine yung objective function, it involves
maximization of the company’s CM.
e.g., Maximize Z (CM) = 3A + 4B: 3 & 4 – CMUs of each products
- Anong magpipigil na ma-reach ang objective? Constraints, kaya
kapag walang constrainits, produce lang nang produce ng units.
- Non-negativity constraint function – Yung ilalagay na numbers
na isa-substitute sa number of units, bawal negative kaya, A & B ≥
0.
- Optimal Product Mix/ Best Product Combination –
combination of products that will give the company the highest
profit.
- To compute for the optimal product mix: Consider the GRAPHIC METHOD
combinations between products A & B. - Yung pag plot sa graph is comparable to X & Y axis.
- I-plot lang yung M1 & M2 combinations.
- Para marepresent yung “=” sa graph, need i-shade yung graph.
- Kung saan nag-merge yung blue at yellow, ito yung feasible region, which
means dito lang possibleng mangyari yung production.
- Kaya tinanggal yung 60,0 at 0,40 kasi malayo sa feasible region.
- Then, identify the corner points ng feasible region.
- Yung algebra na simultaneous solving, ang counterpart sa graph ay the
intersection.
- Sa BE, hindi graphic, pero in practice mas ginagamit ito.

Credits to Sir Aljon’s discussion

ANALYSIS:

To compute for the OPTIMAL PRODUCT MIX/ BEST PRODUCT

COMBINATION:

- Magco-consider ng combinations Product A & B. Titingnan kung anong value

ng Z, remember na ang Z function is 3A + 4B.
- Provide three columns for Product A, Product B, & Z (CM).