Chapter 10 Reading

Question 1

what are the 5 steps in the decision making process?

Answer 1

step 1. gather information

step 2. predict future costs under 2 alternatives

step 3. choosing an alternative

step 4. implementing the decision

step 5. evaluating the decision

Question 2

relevant costs = ?

Answer 2

expected future costs that differ among alternative courses of action

cost must occur in the future

cost must differ across alternative courses of action

these costs are impacted and considered when making decisions

Question 3

relevant revenues = ?

Answer 3

expected future revenues that differ among alternative courses of action

managers select course of action based on future expected results

must differ among alternative courses of action

Question 4

which type of costs and revenues do managers consider when making decisions?

Answer 4

only relevant ones

this is to lessen confusion

Question 5

the consequences of alternatives can be divided into two broad categories…?

Answer 5

quantitative and qualitative

Question 6

quantitative factors = ?

Answer 6

factors that are measured in numerical terms

e.g., units, monetary amounts etc

Question 7

qualitative factors = ?

Answer 7

outcomes that cannot be measured in numerical terms

e.g., employee morale

Question 8

do managers’ decisions impact output levels?

Answer 8

yes

e.g., whether to produce new products or sell more units etc.

when changes in output levels occur, management are interested in its effects

Question 9

what are past events in accounting considered?

Answer 9

sunk costs

costs that shouldn’t be considered when making decisions as they can’t be impacted as they were in the PAST

Question 9

incremental costs = ?

Answer 9

additional costs to obtain an additional quantity, over and above existing or planned quantities of a cost object

Question 10

what are the 2 relevant costs criteria?

Answer 10

cost must not be sunk (in the past)

cost must be differential (varies amongst alternative options)

Question 11

when do you accept or reject a special order?

Answer 11

when incremental revenue exceeds incremental costs

Question 12

idle capacity = ?

Answer 12

the ability to perform more output

extra space

offers can only be accepted if there is idle capacity

otherwise other activities would have to be foregone/displaced

Question 13

incremental costs = ?

Answer 13

additional costs to obtain an additional quantity above existing/planned quantities

Question 14

outsourcing = ?

Answer 14

the process of purchasing goods and services from outside vendors rather than producing within the organisation

Question 15

make-or-buy decisions = ?

Answer 15

decisions about whether a producer of goods/services will insource or outsource

Question 16

incremental costs = differential costs?

Answer 16

yes, true, they’re interchangeable

Question 17

opportunity cost = ?

Answer 17

the contribution to income that is foregone by not using a limited resource in its next-best alternative use

Question 18

constraining factor = ?

Answer 18

factor that restricts or limits the production or sale of a given product

Question 19

unavoidable costs = ?

Answer 19

sunk costs that you can’t get back regardless of decisions you make

e.g., dropping a product line mid-year wont erase the salaries fixed costs paid at the beginning of the year

Question 20

book value = ?

Answer 20

original cost minus accumulated depreciation of an asset

Question 21

which 5 steps may managers understake in a decision making process?

Answer 21

• obtain information
• make predictions
• choose alternative courses of action
• implement decisions
• evaluate performance

Question 22

to be relevant, a revenue or cost must be…

Answer 22

an expected future revenue or cost (not sunk)

must differ across alternative courses of action

Question 23

consequences of alternative actions can be split into which categories?

Answer 23

qualitative (e.g., employee morale, organisational culture, politics)

quantitative (e.g., measured numerically)

Question 24

two common problems in relevant cost analysis?

Answer 24

assuming all variable costs are relevant

assuming all fixed costs are irrelevant

Question 25

opportunity cost is…

Answer 25

maximum available contribution to income that’s foregone by not using a limited resource in its next best alternative use

highlights the way an organisation could optimise their capacity

Question 26

when resource capacity is constrained, managers should…

Answer 26

emphasise the product that yields the highest contribution margin per unit of the constraining factor

Question 27

which costs and revenues are relevant in decision models?

Answer 27

only expected future revenues and costs

book value of existing equipment represents past events and is therefore irrelevant