Lecture 4 - Relevant Costs And Revenue For Decision Making Flashcards
When making decisions only….. costs should be considered
Differential or incremental costs (relevant costs)
What are three examples of costs that should be excluded in the decision making process?
Sunk costs
Costs or revenues that remain the same under all alternatives
Fixed costs that don’t differ between alternatives
When making decision, it is important to consider not only the quantitive implications but also the …. such as…
Qualitative implications …. decreasing employee moral
These can be hard to measure. It’s important hat these factors are considered by management when making decisions
When a firm has spare capacity, it usually results in the firm not being able to…
Bargain on the price.
Often firms must fill the lull in demand in order to cover Fixed costs
When debating accepting an order under market value, what is important to remember in terms of Fixed Costs?
Fixed costs will not increase
What are the 3 main options when assessing whether to accept an order?
Option 1: Don’t accept the order, the temporary excess demand wont last long.
Option 2: What is the opportunity cost of accepting this order. Are there any better alternatives?
Option 3: Is there a possibility to eliminate FC due to reduced demand. Are these savings more than the revenue gained from the short-term contract?
What is the first step when considering the purchase of new machinery?
Compare the book vale of the old machine to the purchase price of the new machine
When considering an existing asset, what is irrelevant?
- Historical cost
- Written down value
- Depreciation
All three are sunk costs that cannot be recovered no matter the decision made
What does the term ‘marginal analysis’ refer to in the context of management accounting? What does this approach not assume?
Marginal analysis refers to making binary decisions (yes or no) based on the contribution (or variable cost) of a product or service.
Marginal analysis doe snot consider whether fixed costs are affected by your decision.
What method should be used in the short-term to decide whether to accept a one-time contract or not?
The contribution method
What is the first step in deciding the product mix a firm should choose?
They need to identify the ‘Limiting Factors’.
If two resources are limiting, identify which resource limits production the most.
Aside from the loss in profit, what is another impact of not meeting the demand from customers?
A loss of customer good will
How is the book value of an old piece of equipment treat in the decision making process? And why?
It is treat as a sunk cost.
The book value is the same for all courses of action.
When considering a replacement piece of machinery, what are the sunk costs relating to the old machine?
- Historic cost.
- Written down value.
- Depreciation.
When considering a replacement piece of machinery, what are the relevant costs relating to the old machine?
- Current salvage value
- Variable operating costs
