Short Term Decision Part2

ACCA F5 - Performance Management 

Shut-down decision: This involves decision about whether or not to drop a service, product or department because the part is not profitable. The key is the proper handling of fixed costs as fixed costs are sometime avoidable (i.e. relevant).

Cost vs. Benefit of shut-down

Costs	Benefits
Quantifiable
Contribution lost from shut-down part	Specific fixed cost saving
Non precisely quantifiable at the time of closure
Penalties: redundancy, compensation	Contribution from alternative use for resources
Reorganization costs

One off contract / Special contract:

Contract for special order that, occurs infrequently but is equally important to the organisational decision making. Company has to consider an order at a special price. Relevant costing is used in deciding whether to proceed with the special contract or not.

To break-even (fixed cost are often ignored, however check the question requirement)

The minimum contract price  = total relevant cash flows associated with contract.

Where, the contract price received does not cover relevant costs of proceeding with contract then it should be rejected.

Joint product further processing decision:

Back in article "027 Process Costing Part6" we cost accounting for joint product.

Joint products are products, which are outcome of common process and require separate processing form split off point. E.g. sheep wool and meat. Once the sheep is ready and meat and wool is separated it should be decided on whether to sell at this point or refine wool to woolen fabric and raw meat to meat items.

Cost incurred before spilt off point are called joint costs and must be shared between joint product produced. Check the article for quick recap on cost allocation to joint products.

Further processing decision:

Costs incurred after split off point are future incremental cash-flows and the only relevant costs for further processing decision. These costs are compared to extra revenue generated from further processed products. Joint costs are irrelevant in further processing decision because they are past costs incurred before split off point.