Chapter 7- Relevant costing Flashcards
steps for decision making
- identify the problem and assign responsibility
- determine and evaluate possible courses of action
- make a decision
- review results of the decision.
incremental analysis
process used to identify the financial data that changes under alternative courses of action
concepts used in incremental analysis
- relevant costs
- opportunity costs
- sunk cost
relevant cost
costs and revenues that differ across alternatives.
opportunity cost
what you give up when you make a choice
sunk cost
costs that have already been incurred and will not be changed or avoided by any present or future decision.
special order decision tool
When units can be produced within existing plant capacity, the special order will not increase fixed costs.
make or buy decision
management must determine the costs which are different under the two alternatives.
and consider the opportunity cost
sell or process further
rule: process further as long as the incremental revenue from such processing exceeds the incremental processing cost
incremental revenue
the increase in sales which results from processing the product further
replacing or retaining equipment
The book value of the old machine is a sunk cost which does not affect the decision.
Segment elimination decision tool
rule: retain the segment unless fixed costs eliminated exceed contribution margin lost,
- Special order formula
special order Selling price per unit - Variable costs per unit = income per unit`
- Total income formula
income per unit X number of special order units
Differential cost
cost to make - cost to buy
