Chapter 9
Managerial Accounting
Resource Allocation
Decisions
Prepared by Diane Tanner
University of North Florida
Production Constraints
Constraints occur when the capacity to
manufacture a product or provide a service
is limited in some manner
 Examples
 Labor
 Skilled craftspeople
 Facilities
 Special machinery
 Limited factory space
 Materials
 Limited availability
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Influence of Constraints
 Limited resources may cause management to
focus on the constraint instead of the
contribution margin per unit
 Goal
 Determine the most profitable
allocation of resources
 i.e., which product will contribute the most
to profit
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Decisions When Resources are Limited
 If products are mutually exclusive
 Occurs when events do not occur at the same time
 i.e., a customer will buy one product instead of the
other; does not insist that both be purchased
 If products are not mutually exclusive
 Occurs when customers insist on having more than
one product available
Limited Resource Decisions When
Products are Mutually Exclusive
How to select products to produce/sell
Step 1: Determine contribution margin per unit
per constrained resource of each product or
service
Step 2: Choose the product/service with the
highest CM per constrained resource to
produce; Produce zero of the other products
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Limited Resource Decisions When Multiple
Product Production Required
How to select products to produce/sell
Step 1: Determine contribution margin per unit per
constrained resource
Step 2: Choose the product/service with the lowest CM
per constrained resource to produce the product with
the minimum quantity required
Step 3: Determine the resource used for the product with
minimum units
Step 4: Subtract the resource to be used for the product
with minimum units from the total resource
available
Step 5: Allocate the remaining resource to the second
product
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Mutually Exclusive Allocation
WatCo manufactures and sells two products. Customers will
buy either product with no demand on other products. There are
1,200 machine hours available.
X21 R45
Selling price
$55 $88
Variable costs
$30 $48
Machine hours
2.5
4.2
Step 1: Contribution margin per unit of limited resource
X21: ($55 - $30) / 2.5 hours = $10 /machine hour
R45: ($88 - $48) / 4.2 hours = $9.52 /machine hour
Step 2: Produce only the product with the best use of the resource.
Product X21: 1,200/2.5 = 480 units
Product R45: 0 units
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Non-Mutually Exclusive Allocation
WatCo must produce a minimum of 100 of each product. There
are 1,200 machine hours available.
X21 R45
Selling price
$55 $88
Variable costs
$30 $48
Machine hours
2.5
4.2
Step 1: Contribution margin per unit of limited resource
X21: ($55 - $30) / 2.5 hours = $10 /machine hour
R45: ($88 - $48) / 4.2 hours = $9.52 /machine hour
Step 2: Produce minimum units of the least profitable product
Product R45: 100 units
Usage = 100 * 4.2 = 420 hours
Step 3: Use all remaining resources on the most profitable product.
Remaining hours: 1,200 – 420 = 780
Product X21: = 780/2.5 = 312 units
The End
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