Assignment Prompt & Instructions
– ## ManagementApplicationsofAccountingACC5301UnitVDB.docx
– ## UnitVStudyGuide.pdf
**## ManagementApplicationsofAccountingACC5301UnitVDB.docx**
2
Management Applications of Accounting ACC 5301 DB V
Post 1: Initial post addressing the discussion board topic is due by the end of day on Saturday.
• Your initial post should be at least 300 words in length.
• Your initial post should include at least one APA-formatted scholarly, professional, or textbook reference with accompanying in-text citation to support any paraphrased, summarized, or quoted material.
Do you think more regulations and standards are needed for setting product prices, or should all companies be free to charge any prices they want? Why, or why not?
**## UnitVStudyGuide.pdf**
ACC 5301, Management Applications of Accounting 1
Course Learning Outcomes for Unit V
Upon completion of this unit, students should be able to:
2. Apply accounting concepts to the creation of accounting information and reports.
2.3 Create accounting reports to make business decisions.
2.4 Use accounting data to make pricing decisions.
5. Discuss compliance requirements of accounting information.
5.2 Identify compliance and regulatory requirements related to product pricing.
Required Unit Resources
Chapter 7: The Use of Cost Information in Management Decision Making, pp. 7-1 – 7-18
Chapter 8: Pricing Decisions, Customer Profitability Analysis, and Activity-Based Pricing, pp. 8-1 – 8-
13
Unit Lesson
Introduction
Welcome to Unit V. We will be discussing how cost information is used to make business decisions and how
product pricing decisions are made using various techniques. To begin our discussion, we will look at how
accounting information is used in making decisions that involve choosing between alternatives such as
expanding or removing operating locations, purchasing equipment, and more. Then we will expand our
discussion to look at how prices are set using various accounting techniques.
Making Business Decisions
In business, we often have to choose between various options. For example, we may need to determine if we
should purchase Equipment A or Equipment B, make or buy components, close one of our locations, or
expand our product line. When making these decisions, we focus on incremental analysis or the difference
between incremental revenue and incremental expense. This means we look at the difference in revenue
between two alternatives and the difference in expenses between two alternates to determine which
alternative would generate the most profit for the company.
Two Alternatives
In our first example, we will look at deciding between two alternative pieces of equipment. As you can see,
each piece of equipment has a different amount of revenue that is generated and different costs associated
with running that piece of equipment, which means each piece of equipment will generate a different amount
of profit for the company. By doing this incremental analysis, we see that Equipment B, in this case, will
generate almost $90,000 more profit for the company than Equipment A.
UNIT V STUDY GUIDE
Cost Information and Pricing
ACC 5301, Management Applications of Accounting 2
UNIT x STUDY GUIDE
Title
Make or Buy
Another example of a typical business decision using incremental analysis is to determine if the company
should purchase a component or make it themselves. This is known as a make-or-buy decision. Let's go back
to our computer manufacturer example that we have been using in this course. Let's say we want to decide if
it is better to make the processor components ourselves or to purchase them from an outside vendor. In this
example, we can see that it is less expensive to make the components than to purchase them. While we may
be saving money on the materials, labor, variable overhead and some management salaries, the cost to
purchase the components at the price quoted is too high to offset the savings by $120,000.
Close a Division
In our third example, we will look at the decision to drop a product line or close a division. Again, going back
to our computer manufacturer, let's see what would happen if we decide to drop our laptop division and only
keep our desktop division. In this example, we are going to say that the laptop division is losing money and
the initial response would be to close the division. In other words, why keep a division that does not make a
profit. However, looking more closely at this analysis, if we close the laptop division, the overall net income for
the company would drop by $4,500 in our incremental analysis. The reason for this is the laptop division is
offsetting some of the very high fixed costs of the company. Therefore, even though the division as a unit is
losing money, it is still generating income overall for the company to offset those high fixed costs. At this
ACC 5301, Management Applications of Accounting 3
UNIT x STUDY GUIDE
Title
point, management may need to see how they can increase operating efficiency with the laptop division rather
than just dropping the division.
We have spent a great deal of time looking at the numbers when making these important business decisions.
However, as a manager, there are also qualitative considerations to take into account when making
decisions. These decisions look at other factors that may affect business such as regular constraints, overall
economic conditions, and even employee morale. For example, going back to our example to close the laptop
division of our company, this would mean that employees would lose their jobs. How would this effect the
desktop division employees? In other words, would their efficiency decline, would there be high turnover as
employees look for other jobs in fear they too may lose their jobs? The point here is, as managers, you need
to not only look at the numbers but also consider all of the effects on the company of a business decision.
Pricing Decisions
Special Orders
Looking at the idea of how incremental analysis can be used in pricing decisions, we will look at the concept
of special orders. This is a common pricing decision companies often make to determine the cost of accepting
a special order. A special order is when a company accepts an order that is outside of what the business
normally produces, and that order does not affect the production of its normal products (Jiambalvo, 2020). For
example, our computer manufacturer is considering accepting a special order for a special price to make
laptops with additional memory. In order to determine if this special order is worth the additional revenue, the
computer manufacturer will use an incremental analysis.
First, the company needs to look at the revenue that would be gained if it produced the special order laptops.
In this case, the additional revenue would be $1,000,000. Then the company needs to look at the additional
costs associated with making these
special order computers. Since the
computers need additional memory,
there is an added cost of $500,000 for
the parts. Then the company needs to
account for the salaries of the workers
that will be needed to assemble these
computers, which would be $390,000.
Finally, there is additional overhead
associated with making these special
order computers of $250,000. Overall,
once this incremental analysis is
complete this special order would wind
(Jiambalvo, 2020)
ACC 5301, Management Applications of Accounting 4
UNIT x STUDY GUIDE
Title
up costing the company $140,000. Consequently, the company should reject the special order or renegotiate
the selling price.
Another important issue related to product pricing relates to basic economics. For example, as the demand
for the product increases, the supply on hand will decrease, and this will drive up the price of the product. We
see this all of the time during the holiday season. The price of a child's toy may be $29.99, but as the demand
for that toy increases and stores run out of stock (or supply) of the toy, the price of that same toy will increase
drastically. In other words, you may find it online for $150.00 when its original selling price was much less.
This is the effect of a limited supply and a high demand.
Knowing the demand for a product is often difficult for managers. In our previous example, the company
was out of stock (or supply), driving up the price; however, it may go the other way, and that same $29.99
toy that managers thought was going to be a big seller winds up not selling at all, and they are overstocked
in inventory. This would mean that in order to sell the toy, they would need to lower the price to $19.99. In
this example, the supply (or stock) was greater than the demand, so the price needs to be lowered to sell
the product.
Cost-Plus Pricing
Due to the uncertainty related to pricing, many companies use cost-plus pricing. In other words, companies
start with an estimate of the product's cost and then add on a reasonable amount of profit. For example, if it
costs the company $1,000 to make a computer, then the company marks it up 30% to sell it for $1,300. This
seems like a good way to ensure costs are covered and the company makes a reasonable profit. The
challenge is to determine what the appropriate amount of markup is for the product. If it is too high of a
markup, no one will buy the product; too low, the company estimates may have been incorrect, and selling
price may not cover the actual cost (Jiambalvo, 2019).
Target Costing
Target costing is an overall way used to determine the product features, price, cost, and design that will
provide the company with the most profit. In this costing method, the company looks first at the selling price of
the product based on its features and then subtracts out the profit needed on that product to arrive at the
target cost for the product (Jiambalvo, 2019). Again, looking at our computer manufacturing company, let's
say the engineers develop a new computer with unique
features that should sell for $3,500. Then the company
calculates the profit it wants to make on this new product.
This leaves a target cost for the new product that the
company needs to meet. In other words, using this example,
the cost to make the new product needs to be $2,450.
Activity-Based Pricing
In activity-based pricing, customers are given separate prices for
additional services that accompany the product. Using our
computer manufacturing company, customers would be charged
a per-item fee for each additional service associated with the
sale of the computer. As an example, customers may be
charged an ordering or packing fee.
Conclusion
In this unit, we have looked at making common business decisions using accounting data. For example, we
looked at deciding between two products, deciding if it is more cost effective to make or buy a product, and
deciding if a company should close a division. In addition to looking at how accounting data is used to make
common business decisions, we also looked at pricing decisions. Some of these decisions included accepting
special orders, cost-plus pricing, target costing, and activity-based pricing.
Reference
(Jiambalvo, 2020)
ACC 5301, Management Applications of Accounting 5
UNIT x STUDY GUIDE
Title
Jiambalvo, J. (2020). Managerial accounting (7th ed.). Wiley.
https://bookshelf.vitalsource.com/#/books/9781119577706
Suggested Unit Resources
View the following videos by accessing the Unit V Additional Unit Resources folder in the unit.
The video Method: Incremental Analysis will discuss how managers make decisions looking at cost data.
You can access a transcript for this video by hovering over the PDF button at the bottom of the video and
then clicking on the word “Transcript.” Alternatively, you can click on the “cc” button at the bottom of the video
to turn on closed captions.
The video Zappos: Pricing will discuss pricing practices within a company.
You can access a transcript for this video by hovering over the PDF button at the bottom of the video and
then clicking on the word “Transcript.” Alternatively, you can click on the “cc” button at the bottom of the video
to turn on closed captions.
Learning Activities (Nongraded)
Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit
them. If you have questions, contact your instructor for further guidance and information.
After watching both videos in the Suggested Unit Resources, you may want to view the Chapter 7 Flash
Cards and the Chapter 8 Flash Cards found in the Additional Unit Resources folder to reinforce the material
presented in this unit.
**## UnitVStudyGuide.pdf**
ACC 5301, Management Applications of Accounting 1
Course Learning Outcomes for Unit V
Upon completion of this unit, students should be able to:
2. Apply accounting concepts to the creation of accounting information and reports.
2.3 Create accounting reports to make business decisions.
2.4 Use accounting data to make pricing decisions.
5. Discuss compliance requirements of accounting information.
5.2 Identify compliance and regulatory requirements related to product pricing.
Required Unit Resources
Chapter 7: The Use of Cost Information in Management Decision Making, pp. 7-1 – 7-18
Chapter 8: Pricing Decisions, Customer Profitability Analysis, and Activity-Based Pricing, pp. 8-1 – 8-
13
Unit Lesson
Introduction
Welcome to Unit V. We will be discussing how cost information is used to make business decisions and how
product pricing decisions are made using various techniques. To begin our discussion, we will look at how
accounting information is used in making decisions that involve choosing between alternatives such as
expanding or removing operating locations, purchasing equipment, and more. Then we will expand our
discussion to look at how prices are set using various accounting techniques.
Making Business Decisions
In business, we often have to choose between various options. For example, we may need to determine if we
should purchase Equipment A or Equipment B, make or buy components, close one of our locations, or
expand our product line. When making these decisions, we focus on incremental analysis or the difference
between incremental revenue and incremental expense. This means we look at the difference in revenue
between two alternatives and the difference in expenses between two alternates to determine which
alternative would generate the most profit for the company.
Two Alternatives
In our first example, we will look at deciding between two alternative pieces of equipment. As you can see,
each piece of equipment has a different amount of revenue that is generated and different costs associated
with running that piece of equipment, which means each piece of equipment will generate a different amount
of profit for the company. By doing this incremental analysis, we see that Equipment B, in this case, will
generate almost $90,000 more profit for the company than Equipment A.
UNIT V STUDY GUIDE
Cost Information and Pricing
ACC 5301, Management Applications of Accounting 2
UNIT x STUDY GUIDE
Title
Make or Buy
Another example of a typical business decision using incremental analysis is to determine if the company
should purchase a component or make it themselves. This is known as a make-or-buy decision. Let's go back
to our computer manufacturer example that we have been using in this course. Let's say we want to decide if
it is better to make the processor components ourselves or to purchase them from an outside vendor. In this
example, we can see that it is less expensive to make the components than to purchase them. While we may
be saving money on the materials, labor, variable overhead and some management salaries, the cost to
purchase the components at the price quoted is too high to offset the savings by $120,000.
Close a Division
In our third example, we will look at the decision to drop a product line or close a division. Again, going back
to our computer manufacturer, let's see what would happen if we decide to drop our laptop division and only
keep our desktop division. In this example, we are going to say that the laptop division is losing money and
the initial response would be to close the division. In other words, why keep a division that does not make a
profit. However, looking more closely at this analysis, if we close the laptop division, the overall net income for
the company would drop by $4,500 in our incremental analysis. The reason for this is the laptop division is
offsetting some of the very high fixed costs of the company. Therefore, even though the division as a unit is
losing money, it is still generating income overall for the company to offset those high fixed costs. At this
ACC 5301, Management Applications of Accounting 3
UNIT x STUDY GUIDE
Title
point, management may need to see how they can increase operating efficiency with the laptop division rather
than just dropping the division.
We have spent a great deal of time looking at the numbers when making these important business decisions.
However, as a manager, there are also qualitative considerations to take into account when making
decisions. These decisions look at other factors that may affect business such as regular constraints, overall
economic conditions, and even employee morale. For example, going back to our example to close the laptop
division of our company, this would mean that employees would lose their jobs. How would this effect the
desktop division employees? In other words, would their efficiency decline, would there be high turnover as
employees look for other jobs in fear they too may lose their jobs? The point here is, as managers, you need
to not only look at the numbers but also consider all of the effects on the company of a business decision.
Pricing Decisions
Special Orders
Looking at the idea of how incremental analysis can be used in pricing decisions, we will look at the concept
of special orders. This is a common pricing decision companies often make to determine the cost of accepting
a special order. A special order is when a company accepts an order that is outside of what the business
normally produces, and that order does not affect the production of its normal products (Jiambalvo, 2020). For
example, our computer manufacturer is considering accepting a special order for a special price to make
laptops with additional memory. In order to determine if this special order is worth the additional revenue, the
computer manufacturer will use an incremental analysis.
First, the company needs to look at the revenue that would be gained if it produced the special order laptops.
In this case, the additional revenue would be $1,000,000. Then the company needs to look at the additional
costs associated with making these
special order computers. Since the
computers need additional memory,
there is an added cost of $500,000 for
the parts. Then the company needs to
account for the salaries of the workers
that will be needed to assemble these
computers, which would be $390,000.
Finally, there is additional overhead
associated with making these special
order computers of $250,000. Overall,
once this incremental analysis is
complete this special order would wind
(Jiambalvo, 2020)
ACC 5301, Management Applications of Accounting 4
UNIT x STUDY GUIDE
Title
up costing the company $140,000. Consequently, the company should reject the special order or renegotiate
the selling price.
Another important issue related to product pricing relates to basic economics. For example, as the demand
for the product increases, the supply on hand will decrease, and this will drive up the price of the product. We
see this all of the time during the holiday season. The price of a child's toy may be $29.99, but as the demand
for that toy increases and stores run out of stock (or supply) of the toy, the price of that same toy will increase
drastically. In other words, you may find it online for $150.00 when its original selling price was much less.
This is the effect of a limited supply and a high demand.
Knowing the demand for a product is often difficult for managers. In our previous example, the company
was out of stock (or supply), driving up the price; however, it may go the other way, and that same $29.99
toy that managers thought was going to be a big seller winds up not selling at all, and they are overstocked
in inventory. This would mean that in order to sell the toy, they would need to lower the price to $19.99. In
this example, the supply (or stock) was greater than the demand, so the price needs to be lowered to sell
the product.
Cost-Plus Pricing
Due to the uncertainty related to pricing, many companies use cost-plus pricing. In other words, companies
start with an estimate of the product's cost and then add on a reasonable amount of profit. For example, if it
costs the company $1,000 to make a computer, then the company marks it up 30% to sell it for $1,300. This
seems like a good way to ensure costs are covered and the company makes a reasonable profit. The
challenge is to determine what the appropriate amount of markup is for the product. If it is too high of a
markup, no one will buy the product; too low, the company estimates may have been incorrect, and selling
price may not cover the actual cost (Jiambalvo, 2019).
Target Costing
Target costing is an overall way used to determine the product features, price, cost, and design that will
provide the company with the most profit. In this costing method, the company looks first at the selling price of
the product based on its features and then subtracts out the profit needed on that product to arrive at the
target cost for the product (Jiambalvo, 2019). Again, looking at our computer manufacturing company, let's
say the engineers develop a new computer with unique
features that should sell for $3,500. Then the company
calculates the profit it wants to make on this new product.
This leaves a target cost for the new product that the
company needs to meet. In other words, using this example,
the cost to make the new product needs to be $2,450.
Activity-Based Pricing
In activity-based pricing, customers are given separate prices for
additional services that accompany the product. Using our
computer manufacturing company, customers would be charged
a per-item fee for each additional service associated with the
sale of the computer. As an example, customers may be
charged an ordering or packing fee.
Conclusion
In this unit, we have looked at making common business decisions using accounting data. For example, we
looked at deciding between two products, deciding if it is more cost effective to make or buy a product, and
deciding if a company should close a division. In addition to looking at how accounting data is used to make
common business decisions, we also looked at pricing decisions. Some of these decisions included accepting
special orders, cost-plus pricing, target costing, and activity-based pricing.
Reference
(Jiambalvo, 2020)
ACC 5301, Management Applications of Accounting 5
UNIT x STUDY GUIDE
Title
Jiambalvo, J. (2020). Managerial accounting (7th ed.). Wiley.
https://bookshelf.vitalsource.com/#/books/9781119577706
Suggested Unit Resources
View the following videos by accessing the Unit V Additional Unit Resources folder in the unit.
The video Method: Incremental Analysis will discuss how managers make decisions looking at cost data.
You can access a transcript for this video by hovering over the PDF button at the bottom of the video and
then clicking on the word “Transcript.” Alternatively, you can click on the “cc” button at the bottom of the video
to turn on closed captions.
The video Zappos: Pricing will discuss pricing practices within a company.
You can access a transcript for this video by hovering over the PDF button at the bottom of the video and
then clicking on the word “Transcript.” Alternatively, you can click on the “cc” button at the bottom of the video
to turn on closed captions.
Learning Activities (Nongraded)
Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit
them. If you have questions, contact your instructor for further guidance and information.
After watching both videos in the Suggested Unit Resources, you may want to view the Chapter 7 Flash
Cards and the Chapter 8 Flash Cards found in the Additional Unit Resources folder to reinforce the material
presented in this unit.
**## ManagementApplicationsofAccountingACC5301UnitVDB.docx**
2
Management Applications of Accounting ACC 5301 DB V
Post 1: Initial post addressing the discussion board topic is due by the end of day on Saturday.
• Your initial post should be at least 300 words in length.
• Your initial post should include at least one APA-formatted scholarly, professional, or textbook reference with accompanying in-text citation to support any paraphrased, summarized, or quoted material.
Do you think more regulations and standards are needed for setting product prices, or should all companies be free to charge any prices they want? Why, or why not?
**## UnitVStudyGuide.pdf**
ACC 5301, Management Applications of Accounting 1
Course Learning Outcomes for Unit V
Upon completion of this unit, students should be able to:
2. Apply accounting concepts to the creation of accounting information and reports.
2.3 Create accounting reports to make business decisions.
2.4 Use accounting data to make pricing decisions.
5. Discuss compliance requirements of accounting information.
5.2 Identify compliance and regulatory requirements related to product pricing.
Required Unit Resources
Chapter 7: The Use of Cost Information in Management Decision Making, pp. 7-1 – 7-18
Chapter 8: Pricing Decisions, Customer Profitability Analysis, and Activity-Based Pricing, pp. 8-1 – 8-
13
Unit Lesson
Introduction
Welcome to Unit V. We will be discussing how cost information is used to make business decisions and how
product pricing decisions are made using various techniques. To begin our discussion, we will look at how
accounting information is used in making decisions that involve choosing between alternatives such as
expanding or removing operating locations, purchasing equipment, and more. Then we will expand our
discussion to look at how prices are set using various accounting techniques.
Making Business Decisions
In business, we often have to choose between various options. For example, we may need to determine if we
should purchase Equipment A or Equipment B, make or buy components, close one of our locations, or
expand our product line. When making these decisions, we focus on incremental analysis or the difference
between incremental revenue and incremental expense. This means we look at the difference in revenue
between two alternatives and the difference in expenses between two alternates to determine which
alternative would generate the most profit for the company.
Two Alternatives
In our first example, we will look at deciding between two alternative pieces of equipment. As you can see,
each piece of equipment has a different amount of revenue that is generated and different costs associated
with running that piece of equipment, which means each piece of equipment will generate a different amount
of profit for the company. By doing this incremental analysis, we see that Equipment B, in this case, will
generate almost $90,000 more profit for the company than Equipment A.
UNIT V STUDY GUIDE
Cost Information and Pricing
ACC 5301, Management Applications of Accounting 2
UNIT x STUDY GUIDE
Title
Make or Buy
Another example of a typical business decision using incremental analysis is to determine if the company
should purchase a component or make it themselves. This is known as a make-or-buy decision. Let's go back
to our computer manufacturer example that we have been using in this course. Let's say we want to decide if
it is better to make the processor components ourselves or to purchase them from an outside vendor. In this
example, we can see that it is less expensive to make the components than to purchase them. While we may
be saving money on the materials, labor, variable overhead and some management salaries, the cost to
purchase the components at the price quoted is too high to offset the savings by $120,000.
Close a Division
In our third example, we will look at the decision to drop a product line or close a division. Again, going back
to our computer manufacturer, let's see what would happen if we decide to drop our laptop division and only
keep our desktop division. In this example, we are going to say that the laptop division is losing money and
the initial response would be to close the division. In other words, why keep a division that does not make a
profit. However, looking more closely at this analysis, if we close the laptop division, the overall net income for
the company would drop by $4,500 in our incremental analysis. The reason for this is the laptop division is
offsetting some of the very high fixed costs of the company. Therefore, even though the division as a unit is
losing money, it is still generating income overall for the company to offset those high fixed costs. At this
ACC 5301, Management Applications of Accounting 3
UNIT x STUDY GUIDE
Title
point, management may need to see how they can increase operating efficiency with the laptop division rather
than just dropping the division.
We have spent a great deal of time looking at the numbers when making these important business decisions.
However, as a manager, there are also qualitative considerations to take into account when making
decisions. These decisions look at other factors that may affect business such as regular constraints, overall
economic conditions, and even employee morale. For example, going back to our example to close the laptop
division of our company, this would mean that employees would lose their jobs. How would this effect the
desktop division employees? In other words, would their efficiency decline, would there be high turnover as
employees look for other jobs in fear they too may lose their jobs? The point here is, as managers, you need
to not only look at the numbers but also consider all of the effects on the company of a business decision.
Pricing Decisions
Special Orders
Looking at the idea of how incremental analysis can be used in pricing decisions, we will look at the concept
of special orders. This is a common pricing decision companies often make to determine the cost of accepting
a special order. A special order is when a company accepts an order that is outside of what the business
normally produces, and that order does not affect the production of its normal products (Jiambalvo, 2020). For
example, our computer manufacturer is considering accepting a special order for a special price to make
laptops with additional memory. In order to determine if this special order is worth the additional revenue, the
computer manufacturer will use an incremental analysis.
First, the company needs to look at the revenue that would be gained if it produced the special order laptops.
In this case, the additional revenue would be $1,000,000. Then the company needs to look at the additional
costs associated with making these
special order computers. Since the
computers need additional memory,
there is an added cost of $500,000 for
the parts. Then the company needs to
account for the salaries of the workers
that will be needed to assemble these
computers, which would be $390,000.
Finally, there is additional overhead
associated with making these special
order computers of $250,000. Overall,
once this incremental analysis is
complete this special order would wind
(Jiambalvo, 2020)
ACC 5301, Management Applications of Accounting 4
UNIT x STUDY GUIDE
Title
up costing the company $140,000. Consequently, the company should reject the special order or renegotiate
the selling price.
Another important issue related to product pricing relates to basic economics. For example, as the demand
for the product increases, the supply on hand will decrease, and this will drive up the price of the product. We
see this all of the time during the holiday season. The price of a child's toy may be $29.99, but as the demand
for that toy increases and stores run out of stock (or supply) of the toy, the price of that same toy will increase
drastically. In other words, you may find it online for $150.00 when its original selling price was much less.
This is the effect of a limited supply and a high demand.
Knowing the demand for a product is often difficult for managers. In our previous example, the company
was out of stock (or supply), driving up the price; however, it may go the other way, and that same $29.99
toy that managers thought was going to be a big seller winds up not selling at all, and they are overstocked
in inventory. This would mean that in order to sell the toy, they would need to lower the price to $19.99. In
this example, the supply (or stock) was greater than the demand, so the price needs to be lowered to sell
the product.
Cost-Plus Pricing
Due to the uncertainty related to pricing, many companies use cost-plus pricing. In other words, companies
start with an estimate of the product's cost and then add on a reasonable amount of profit. For example, if it
costs the company $1,000 to make a computer, then the company marks it up 30% to sell it for $1,300. This
seems like a good way to ensure costs are covered and the company makes a reasonable profit. The
challenge is to determine what the appropriate amount of markup is for the product. If it is too high of a
markup, no one will buy the product; too low, the company estimates may have been incorrect, and selling
price may not cover the actual cost (Jiambalvo, 2019).
Target Costing
Target costing is an overall way used to determine the product features, price, cost, and design that will
provide the company with the most profit. In this costing method, the company looks first at the selling price of
the product based on its features and then subtracts out the profit needed on that product to arrive at the
target cost for the product (Jiambalvo, 2019). Again, looking at our computer manufacturing company, let's
say the engineers develop a new computer with unique
features that should sell for $3,500. Then the company
calculates the profit it wants to make on this new product.
This leaves a target cost for the new product that the
company needs to meet. In other words, using this example,
the cost to make the new product needs to be $2,450.
Activity-Based Pricing
In activity-based pricing, customers are given separate prices for
additional services that accompany the product. Using our
computer manufacturing company, customers would be charged
a per-item fee for each additional service associated with the
sale of the computer. As an example, customers may be
charged an ordering or packing fee.
Conclusion
In this unit, we have looked at making common business decisions using accounting data. For example, we
looked at deciding between two products, deciding if it is more cost effective to make or buy a product, and
deciding if a company should close a division. In addition to looking at how accounting data is used to make
common business decisions, we also looked at pricing decisions. Some of these decisions included accepting
special orders, cost-plus pricing, target costing, and activity-based pricing.
Reference
(Jiambalvo, 2020)
ACC 5301, Management Applications of Accounting 5
UNIT x STUDY GUIDE
Title
Jiambalvo, J. (2020). Managerial accounting (7th ed.). Wiley.
https://bookshelf.vitalsource.com/#/books/9781119577706
Suggested Unit Resources
View the following videos by accessing the Unit V Additional Unit Resources folder in the unit.
The video Method: Incremental Analysis will discuss how managers make decisions looking at cost data.
You can access a transcript for this video by hovering over the PDF button at the bottom of the video and
then clicking on the word “Transcript.” Alternatively, you can click on the “cc” button at the bottom of the video
to turn on closed captions.
The video Zappos: Pricing will discuss pricing practices within a company.
You can access a transcript for this video by hovering over the PDF button at the bottom of the video and
then clicking on the word “Transcript.” Alternatively, you can click on the “cc” button at the bottom of the video
to turn on closed captions.
Learning Activities (Nongraded)
Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit
them. If you have questions, contact your instructor for further guidance and information.
After watching both videos in the Suggested Unit Resources, you may want to view the Chapter 7 Flash
Cards and the Chapter 8 Flash Cards found in the Additional Unit Resources folder to reinforce the material
presented in this unit.
**## ManagementApplicationsofAccountingACC5301UnitVDB.docx**
2
Management Applications of Accounting ACC 5301 DB V
Post 1: Initial post addressing the discussion board topic is due by the end of day on Saturday.
• Your initial post should be at least 300 words in length.
• Your initial post should include at least one APA-formatted scholarly, professional, or textbook reference with accompanying in-text citation to support any paraphrased, summarized, or quoted material.
Do you think more regulations and standards are needed for setting product prices, or should all companies be free to charge any prices they want? Why, or why not?
**## UnitVStudyGuide.pdf**
ACC 5301, Management Applications of Accounting 1
Course Learning Outcomes for Unit V
Upon completion of this unit, students should be able to:
2. Apply accounting concepts to the creation of accounting information and reports.
2.3 Create accounting reports to make business decisions.
2.4 Use accounting data to make pricing decisions.
5. Discuss compliance requirements of accounting information.
5.2 Identify compliance and regulatory requirements related to product pricing.
Required Unit Resources
Chapter 7: The Use of Cost Information in Management Decision Making, pp. 7-1 – 7-18
Chapter 8: Pricing Decisions, Customer Profitability Analysis, and Activity-Based Pricing, pp. 8-1 – 8-
13
Unit Lesson
Introduction
Welcome to Unit V. We will be discussing how cost information is used to make business decisions and how
product pricing decisions are made using various techniques. To begin our discussion, we will look at how
accounting information is used in making decisions that involve choosing between alternatives such as
expanding or removing operating locations, purchasing equipment, and more. Then we will expand our
discussion to look at how prices are set using various accounting techniques.
Making Business Decisions
In business, we often have to choose between various options. For example, we may need to determine if we
should purchase Equipment A or Equipment B, make or buy components, close one of our locations, or
expand our product line. When making these decisions, we focus on incremental analysis or the difference
between incremental revenue and incremental expense. This means we look at the difference in revenue
between two alternatives and the difference in expenses between two alternates to determine which
alternative would generate the most profit for the company.
Two Alternatives
In our first example, we will look at deciding between two alternative pieces of equipment. As you can see,
each piece of equipment has a different amount of revenue that is generated and different costs associated
with running that piece of equipment, which means each piece of equipment will generate a different amount
of profit for the company. By doing this incremental analysis, we see that Equipment B, in this case, will
generate almost $90,000 more profit for the company than Equipment A.
UNIT V STUDY GUIDE
Cost Information and Pricing
ACC 5301, Management Applications of Accounting 2
UNIT x STUDY GUIDE
Title
Make or Buy
Another example of a typical business decision using incremental analysis is to determine if the company
should purchase a component or make it themselves. This is known as a make-or-buy decision. Let's go back
to our computer manufacturer example that we have been using in this course. Let's say we want to decide if
it is better to make the processor components ourselves or to purchase them from an outside vendor. In this
example, we can see that it is less expensive to make the components than to purchase them. While we may
be saving money on the materials, labor, variable overhead and some management salaries, the cost to
purchase the components at the price quoted is too high to offset the savings by $120,000.
Close a Division
In our third example, we will look at the decision to drop a product line or close a division. Again, going back
to our computer manufacturer, let's see what would happen if we decide to drop our laptop division and only
keep our desktop division. In this example, we are going to say that the laptop division is losing money and
the initial response would be to close the division. In other words, why keep a division that does not make a
profit. However, looking more closely at this analysis, if we close the laptop division, the overall net income for
the company would drop by $4,500 in our incremental analysis. The reason for this is the laptop division is
offsetting some of the very high fixed costs of the company. Therefore, even though the division as a unit is
losing money, it is still generating income overall for the company to offset those high fixed costs. At this
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Title
point, management may need to see how they can increase operating efficiency with the laptop division rather
than just dropping the division.
We have spent a great deal of time looking at the numbers when making these important business decisions.
However, as a manager, there are also qualitative considerations to take into account when making
decisions. These decisions look at other factors that may affect business such as regular constraints, overall
economic conditions, and even employee morale. For example, going back to our example to close the laptop
division of our company, this would mean that employees would lose their jobs. How would this effect the
desktop division employees? In other words, would their efficiency decline, would there be high turnover as
employees look for other jobs in fear they too may lose their jobs? The point here is, as managers, you need
to not only look at the numbers but also consider all of the effects on the company of a business decision.
Pricing Decisions
Special Orders
Looking at the idea of how incremental analysis can be used in pricing decisions, we will look at the concept
of special orders. This is a common pricing decision companies often make to determine the cost of accepting
a special order. A special order is when a company accepts an order that is outside of what the business
normally produces, and that order does not affect the production of its normal products (Jiambalvo, 2020). For
example, our computer manufacturer is considering accepting a special order for a special price to make
laptops with additional memory. In order to determine if this special order is worth the additional revenue, the
computer manufacturer will use an incremental analysis.
First, the company needs to look at the revenue that would be gained if it produced the special order laptops.
In this case, the additional revenue would be $1,000,000. Then the company needs to look at the additional
costs associated with making these
special order computers. Since the
computers need additional memory,
there is an added cost of $500,000 for
the parts. Then the company needs to
account for the salaries of the workers
that will be needed to assemble these
computers, which would be $390,000.
Finally, there is additional overhead
associated with making these special
order computers of $250,000. Overall,
once this incremental analysis is
complete this special order would wind
(Jiambalvo, 2020)
ACC 5301, Management Applications of Accounting 4
UNIT x STUDY GUIDE
Title
up costing the company $140,000. Consequently, the company should reject the special order or renegotiate
the selling price.
Another important issue related to product pricing relates to basic economics. For example, as the demand
for the product increases, the supply on hand will decrease, and this will drive up the price of the product. We
see this all of the time during the holiday season. The price of a child's toy may be $29.99, but as the demand
for that toy increases and stores run out of stock (or supply) of the toy, the price of that same toy will increase
drastically. In other words, you may find it online for $150.00 when its original selling price was much less.
This is the effect of a limited supply and a high demand.
Knowing the demand for a product is often difficult for managers. In our previous example, the company
was out of stock (or supply), driving up the price; however, it may go the other way, and that same $29.99
toy that managers thought was going to be a big seller winds up not selling at all, and they are overstocked
in inventory. This would mean that in order to sell the toy, they would need to lower the price to $19.99. In
this example, the supply (or stock) was greater than the demand, so the price needs to be lowered to sell
the product.
Cost-Plus Pricing
Due to the uncertainty related to pricing, many companies use cost-plus pricing. In other words, companies
start with an estimate of the product's cost and then add on a reasonable amount of profit. For example, if it
costs the company $1,000 to make a computer, then the company marks it up 30% to sell it for $1,300. This
seems like a good way to ensure costs are covered and the company makes a reasonable profit. The
challenge is to determine what the appropriate amount of markup is for the product. If it is too high of a
markup, no one will buy the product; too low, the company estimates may have been incorrect, and selling
price may not cover the actual cost (Jiambalvo, 2019).
Target Costing
Target costing is an overall way used to determine the product features, price, cost, and design that will
provide the company with the most profit. In this costing method, the company looks first at the selling price of
the product based on its features and then subtracts out the profit needed on that product to arrive at the
target cost for the product (Jiambalvo, 2019). Again, looking at our computer manufacturing company, let's
say the engineers develop a new computer with unique
features that should sell for $3,500. Then the company
calculates the profit it wants to make on this new product.
This leaves a target cost for the new product that the
company needs to meet. In other words, using this example,
the cost to make the new product needs to be $2,450.
Activity-Based Pricing
In activity-based pricing, customers are given separate prices for
additional services that accompany the product. Using our
computer manufacturing company, customers would be charged
a per-item fee for each additional service associated with the
sale of the computer. As an example, customers may be
charged an ordering or packing fee.
Conclusion
In this unit, we have looked at making common business decisions using accounting data. For example, we
looked at deciding between two products, deciding if it is more cost effective to make or buy a product, and
deciding if a company should close a division. In addition to looking at how accounting data is used to make
common business decisions, we also looked at pricing decisions. Some of these decisions included accepting
special orders, cost-plus pricing, target costing, and activity-based pricing.
Reference
(Jiambalvo, 2020)
ACC 5301, Management Applications of Accounting 5
UNIT x STUDY GUIDE
Title
Jiambalvo, J. (2020). Managerial accounting (7th ed.). Wiley.
https://bookshelf.vitalsource.com/#/books/9781119577706
Suggested Unit Resources
View the following videos by accessing the Unit V Additional Unit Resources folder in the unit.
The video Method: Incremental Analysis will discuss how managers make decisions looking at cost data.
You can access a transcript for this video by hovering over the PDF button at the bottom of the video and
then clicking on the word “Transcript.” Alternatively, you can click on the “cc” button at the bottom of the video
to turn on closed captions.
The video Zappos: Pricing will discuss pricing practices within a company.
You can access a transcript for this video by hovering over the PDF button at the bottom of the video and
then clicking on the word “Transcript.” Alternatively, you can click on the “cc” button at the bottom of the video
to turn on closed captions.
Learning Activities (Nongraded)
Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit
them. If you have questions, contact your instructor for further guidance and information.
After watching both videos in the Suggested Unit Resources, you may want to view the Chapter 7 Flash
Cards and the Chapter 8 Flash Cards found in the Additional Unit Resources folder to reinforce the material
presented in this unit.
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