acc chapter 12

total cost approach

includes all of the costs and benefits relevant or not

Make or buy decision

- a decision concerning whether an item should be produced internally or purchased from an outside supplier

Special order

- a one-time order that is not considered part of the company's normal ongoing business

differential approach

- focuses solely on the relevant costs and benefits

• Decision making: six key concepts

1. Every decision involves choosing from among at least two alternatives. Therefore, the first step in decision making is to define the alternatives being considered a. Ex. flying or driving. 2. Once you have defined the alternatives, you need to identify the criteria for choosing among them. The key to choosing among alternatives is distinguishing between relevant and irrelevant costs and benefits. Relevant costs and relevant benefits should be considered when making decisions. Irrelevant costs and irrelevant benefits should be ignored when making decisions.

Vertical Integration

the involvement by a company in more than one of the activities in the entire value chain from development through production, distribution, sales, and after sales service.

segment income statement

• Sales • Less: variable expenses • Contribution margin • Less: Fixed Expenses • Net operating income

relevant benefit

a benefit that should be considered when making decisions

3. The key to effective decision making is differential analysis- focusing on the future costs and benefits that differ between the alternatives. Everything else is irrelevant and should be ignored.

a. Differential cost- a future cost that differs between any two alternatives. i. The terms incremental cost and avoidable cost are often used to describe differential costs ii. Incremental cost- an increase in cost between two alternatives iii. Avoidable cost- a cost that can be eliminated by choosing one alternative over another in a decision. This term is synonymous with differential cost and relevant cost. 1. Ex. flying vs. driving. Must take uber if flying. b. Differential revenue- future revenue that differs between any two alternatives i. Differential revenue is an example of a relevant benefit 4. Sunk costs are always irrelevant when choosing among alternatives. 5. Future costs and benefits that do not differ between alternatives are irrelevant to the decision-making process. 6. Opportunity costs also need to be considered when making decisions. An opportunity cost is the potential benefit that is given up one alternative is selected over another. Always Relevant.

Relaxing (or elevating) the constraint

an action that increases the amount of constrained resource. Equivalently an action that increases the capacity of the bottleneck

Relevant cost

a cost that should be considered when making decisions

constraint

a limitation under which a company must operate, such as limited available machine time or raw materials, that restricts the companys ability to satisfy demand

bottleneck

a machine or some part of a process that limits the total output of the entire system