When designing strategies and implementing them, managers must understand which revenues and costs to consider and which ones to ignore. Management accountants help managers identify what information is relevant and what information is irrelevant. Consider a decision about whether to buy a product from an outside vendor or to make it in-house. The costing system indicates that it costs $25 per unit to make the product in-house. A vendor offers to sell the product for $22 per unit. At first glance, it seems it will cost less for the company to buy the product rather than make it. Suppose, however, that of the $25 to make the product in-house, $5 are attributable to plant lease costs that the company has already paid under a lease contract. Furthermore, if the product is bought, the plant will remain idle because it is too costly to retool the plant to make another product. That is, there is no opportunity to use the plant in some other profitable way. Under these conditions, it will cost less to make the product than to buy it. That’s because making the product costs only an additional $20 per unit compared with an additional $22 per unit if it is bought. The $5 per unit of lease cost is irrelevant to the decision because it is a past (or sunk) cost that has already been incurred regardless of whether the product is made or bought. Analyzing relevant information is a key aspect of making decisions.
When making strategic decisions about which products and how much to produce, managers must know how revenues and costs vary with changes in output levels. For this purpose, managers need to separate fixed costs and variable costs. Chapter 3 analyzes how operating income changes with changes in units sold and how managers use this information to make decisions such as how much to spend on advertising. Chapters 10 and 11 describe methods to estimate the fixed and variable components of costs and to make predictions. Chapter 12 applies the concept of relevance to decision making in many different situations and describes methods managers use to maximize income given the resource constraints they face.
Later chapters in the text discuss topics such as strategy evaluation, customer profitability, quality, just-in-time systems, investment decisions, transfer pricing, and performance evaluation. Each of these topics invariably has product costing, planning and control, and decision-making perspectives. A command of the first 12 chapters will help you master these topics. For example, Chapter 13 on strategy describes the balanced scorecard, a set of financial and nonfinancial measures used to implement strategy that builds on the planning and control functions. The section on strategic analysis of operating income builds on ideas of product costing and variance analysis. The section on downsizing and managing capacity builds on ideas of relevant revenues and relevant costs.