Bài giảng môn Kế toán, kiểm toán - Chapter 16: Costs for decision making

© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.Chapter 16Costs for Decision MakingPowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPARelevant Cost InformationLO 116-3 The decision to accept additional business should be based on incremental costs and incremental revenues. Incremental amounts are those amounts that occur if the company decides to accept the new business.The Special Pricing DecisionLO 316-4Should Icontinue to makethe part, or shouldI buy it?The Make or Buy DecisionLO 316-5The relevant cost of making a component is the cost that can be avoided by buying the component from an outside supplier.Decision rule: Costs avoided must be greater than outside supplier’s price to consider buying the component.The Make or Buy DecisionLO 316-6 Managers often face the problem of deciding how scarce resources are going to be utilized. Usually, fixed costs are not affected by this particular decision, so management can focus on maximizing total contribution margin.Short-Term Allocationof Scarce ResourcesLO 316-7Capital budgeting:Analyzing alternative long-term investments and deciding which assets to acquire or sell. Outcomeis uncertain. Large amounts ofmoney are usuallyinvolved. Investment involves along-term commitment. Decision may bedifficult or impossibleto reverse.Capital BudgetingLO 416-8Business investments extend over long periods of time, so we must recognize the time value of money.Investments that promise returns earlier in time are preferable to those that promise returns later in time.LO 5Investment Decision Special Considerations16-9The firm’s cost of capital is usually regarded as the most appropriate choice for the discount rate used to calculate the present value of the investment proposal being analyzed.The cost of capital is the average rate of return the company must pay to its long-term creditors and stockholders for the use of their funds.Cost of CapitalLO 616-10A comparison of the present value of cash inflows with the present value of cash outflowsNet Present Value (NPV)LO 716-11Chose a discount rate – the minimum required rate of return.Calculate the presentvalue of cash inflows.Calculate the presentvalue of cash outflows.NPV =  –  Net Present Value (NPV)LO 716-12Net Present Value (NPV)LO 716-13 The actual rate of return that will be earned by a proposed investment. The interest rate that equates the present value of inflows and outflows from an investment project – the discount rate at which NPV = 0.LO 7Internal Rate of Return (IRR)16-14 Sensitivity analysis and post audits are helpful in dealing with estimates. Cash flows far into the future are often not considered because of uncertainty and a small impact on present values. Cash flows are assumed to occur at the end of the year. Some projects will require additional investments over time.Some Analytical ConsiderationsLO 816-15 Often, after-tax cash flow can be estimated by adding back depreciation expense (a noncash item) to net income. Increased working capital is initially treated as an additional investment (cash outflow)  and as a cash inflow if recovered at the end  of the project’s life. Least cost projects, often required by law, will have negative NPV’s.Some Analytical ConsiderationsLO 816-16Payback PeriodThe payback period of an investmentis the number of years it will take torecover the amount of the investment.Managers prefer investing in projects with shorter payback periods.LO 916-17 The accounting rate of return focuses onaccounting income instead of cash flows. Accounting Operating incomerate of return Average investment=Accounting Rate of ReturnLO 1016-18End of Chapter 1616-19