Chapter 13- Sharpen Flashcards
Why is it important to distinguish between what is relevant and irrelevant?
1) Being able to ignore the data that’s deemed irrelevant saves the decider a lot of time.
2) Bad decisions can be made when you arbitrarily include irrelevant cost and other benefits as you are looking at the alternatives.
What does differential analysis focus on?
Focuses on future costs and benefits for either choice.
Differential Cost
The cost that varies between two decisions is ALWAYS relevant and needs to be considered.
Differential Revenue
Is also always relevant and should be considered.
Incremental Costs
A cost increase between your two alternatives.
Avoidable Costs
Costs that can be gotten rid of by choosing one option over another.
Opportunity Costs
Also relevant. The benefits that go away when one choice is made over another.
Sunk Costs
A cost that already happened and cannot be changed. Have no affect on future costs or purchases.
What are the two methods of decision analysis?
Total Cost Approach and Differential Cost Approach
Total Cost Approach
Uses all costs and benefits in making a decision.
Differential Cost Approach
Only looks at relevant costs and benefits.
Comparative Income Statement
Shows contribution margins and fixed expenses. Allows one to make decision relating to whether product lines or other segments of a company should be dropped or new ones added.
Make or Buy Decision
A decision to carry out one of the activities in the value chain internally, rather than buy externally from a supplier.
Special Order
A one-time order that is not considered part of the company’s normal ongoing business.
Volume Trade-Off Decisions
Companies are forced to make this type of decision when they do not have enough capacity to produce all of the products demanded by their costumers.
