Making Management Decisions Flashcards
Definition of cost
The amount of resources, usually measured in monetary terms, sacrificed to achieve a particular objective
What is a historic cost?
A cost already incurred
What is an opportunity cost?
The value of an opportunity forgone
What is a relevant cost?
1) The costs relate to the objectives of the business
2) The costs relate to the future
3) Costs vary with the decision
What is an irrelevant cost ?
1) The costs do not relate to the objectives of the business
2) The costs do not relate to the future
3) Costs do not vary with the decision
Define a relevant opportunity cost?
The cost of being deprived of the next best option (opportunity)
Future costs that vary with the decision under consideration (relevant)
What are relevant future outlay costs?
Those that vary with the decision
What are irrelevant costs?
Costs that are the same irrespective of which decision is made
What are past costs ?
Costs that were incurred as a result of a past decision
What are irrelevant future outlay costs?
Those that do not vary with the decision
What is risk?
The chance that things will not turn out as expected
Factors affecting the sensitivity of net financial benefit calculations?
- Sales price
- Annual sales volume
- Financing costs
- Project life
- Initial outlay
- Operating costs
- Financing cost
