Unit 8: Differential Analysis

Question 1

In special decision making, define direct and indirect costs.

Answer 1

Direct: Costs directly caused by a specific product or division - materials, labor, depreciation on equipment, salary of division manager

Indirect: Costs that jointly benefit many products or divisions - corporate headquarters costs

Question 2

How can you determine if cost is differential or sunk?

Answer 2

Can I change this cost with my decision (differential) or will the cost be the same no matter what I do (sunk)?

Question 3

How can you determine out-of-pocket vs opportunity costs?

Answer 3

Does the cost involve an actual spending of resources or is the “cost” in the form of missed opportunities?

Question 4

Define Segment Margin

Answer 4

Sales Revenue - Variable Costs - Direct Fixed Costs = Segment Margin

Everything but common (indirect) fixed costs
ex. If a company has three stores and decide to close one store, the entire net income (loss) doesn’t go away - only the segment margin. There are fixed indirect costs (like corporate headquarters) allocated to the store that don’t go away.

Question 5

Define Joint Manufacturing Process.

Answer 5

One input creates several outputs.

Product costs are incurred before product separation.

Question 6

When determining whether to sell a product or process further (ex. oil, gasoline), how do joint product costs affect that decision?

Answer 6

With respect to the decision to sell or process further, joint product costs are sunk and irrelevant.

Question 7

Define Critical Resource Factor

Answer 7

The resource that limits operating capacity

ex. College or university
- physical classroom space
- faculty time
- living quarters
- available students

ex. Shelf space in a retail store