Question

Describe the process managerial accountants use to make recommendations for the three listed types of decisions.

Pricing.

Make or buy assessments.

Replacing machinery.

Answer 1

Process managerial Accountants uses

For Pricing Decisions

Step 1

All the Variable cost such as material cost, Labor cost, Selling expenses, variable overhead is calculated. Fixed Unavoidable cost is ignored.

Step 2

Find out Fixed Avoidable cost and add this to total cost.

Step 3

If company wish to add a percentage of markup then that markup is added to total cost.

Pricing in case of Departmental transfer is done either at profit or relevant cost depending upon policies of company but generally on Relevant cost.

For Make or Buy Assessment

Step 1

Calculate all cost related to manufacturing of component or product. Cost will include Relevant cost only such as Direct material , Direct Labor, Variable Overheads , Other variable expenses, Avoidable Fixed cost. Unavoidable Fixed cost is not considered.

Step 2

If company is able to achieve any benefit due to freeing up of capacity then this benefit will be considered as a cost of manufacturing. This Benefit will be calculated.

Alternatively this benefit may be deducted from cost of Purchase.

Step 3

Calculate Cost of Purchase

Step 4

Compare Cost of Manufacturing with cost of Purchase. The Alternative with lower cost may be accepted.

For Replacing Machinery

Step 1

Calculate cost of New Machine and Maintenance cost of new Machinery

Step 2

Calculate benefits generated by new machine

Step 3

Calculate if there is any resale value of old machinery and Cost of maintenance of old Machinery.

Step 4

Step 4

Calculate net benefit of replacing machinery as follows

Cost of New Machinery                                                                                XXXX

Add: Maintenance cost of New Machinery                          XXXX

Less: Cost of Maintaining Old Machinery                                               XXXX

Less: Benefits Generated by new Machine                          XXXX

Less: Residual value of Old machinery                                    XXXX

                                                                                                                XXXX

If the resulting Figure is positive then machinery will not be replaced and if resulting figure is negative then it means cost of new machine is lower than its benefit and should be replaced.