Long Term Decision

Long Term Decision

1. Variable Costing

   • all variable costing are included as inventoriable cost
   • fixed man cost are excluded
     • period cost
   • Contribution margin format income statement
   • preferred method
     • in line with CVP

2. Absorption Costing

   • variable and fixed are included in inventoriable cost
   • gross margin format income statement
   • used to increase OP (just increase production)
   • Breakeven point depends on
     • fixed cost
     • unit contribution margin
     • sales level in units
     • fixed man cost rate (denominator)
       • smaller: higher fixed man OH cost per output unit that is inventoriable
         • less OP

3. Pricing Decision Factors

   • customers
   • market/competitors
   • cost

4. Long Run Pricing Approach

   • Market Based
     • how much to charge based on customers and competitors
   • Cost Plus
     • how much to charge based on cost
     • cost base + mark up
       • mark up based on target rate of return on investment
         • rate of investment is 10%
         • 10% of investment of 100 is 10
           • 10/10 units to get 1 per unit.
             • mark up is 1 per unit

5. Target Costing for Target Pricing

   • Target price
     • estimated price customers will pay
   • target cost
     • estimated long run cost per unit

6. Life Cycle

   • Enter text here
     • estimated revenues and costs from the whole value chain
   • Costing
     • tracks and accumulates actual costs from start to finish
   • Benefits
     • costs become visible
     • diff total cost among products are highlighted
     • relationship between value chain are highlighted

7. Activity Based Management

   • using ABC info to satisfy customers and manage profits