Last class before the third test. Had a quiz, last one, at start of class. Easy one.
Hmm. Professor just told us that if our quiz grades are poor, he’ll drop them all. This is on top of him dropping the lowest two quizzes regardless. This fits his pattern of inflating the grades. We’re also dropping one test grade, probably, and having some curves. This class is sort of the opposite of a weed-out class.
Relevant Costs are costs that differ between two or more alternatives. A cost that does not differ between the alternatives is not useful as a factor in making a decision.
Avoidable costs are those costs which can be eliminated by choosing one alternative over others. Avoidable costs are by definition relevant. Not all relevant costs are wholly avoidable.
Sunk costs are never relevant. Future costs that do not differ between alternatives are never relevant.
Make or Buy decisions are choices by a company to produce an item internally, or to purchase it from an outside vendor. This sort of decision is heavily influenced by the avoidable costs in producing that item. You should only buy an item externally if it the purchase price would be lower than the avoidable costs of the unit.
Utilization of constrained resources
Anything that prevents an organization from getting more of what it wants is a constraint.
When a constraint is a machine or work center, it is referred to as a bottleneck.
The most constraining resource is the limiter on an entire system. Only improving the smallest constraint will increase the capacity of the system.
Under Theory of Constraints, the maximum contribution margin/profit is attained by maximizing contribution margin per unit of the constrained resource.
Joint Product Costs occur when multiple end products are produced from a single input.
The split-off point is the point in the process at which the joint products can be recognized as separate products. Joint product costs are all product costs which occur prior to the split-off point.
If the incremental revenue from further processing exceeds the incremental processing costs, you should process further. If it doesn’t, you should sell the product without the further processing.
Often, joint product costs are allocated to the multiple end products. These costs are not relevant to the decision of which of those end products should be produced. They are essentially sunk costs for purposes of deciding between the alternative end products.