Accounting Test #3 Review

Differential cost vs differential revenue

Differential cost: The amount of increase or decrease in cost that is expected from a course of action as compared to an alternative. Differential revenue: The amount of increase or decrease in revenue that is expected from a course of action as compared to an alternative.

Definition of an annuity.

Equal periodic payments.

Definition of inflation.

General price levels often increase in a rapidly growing economy.

Which methods use present value for analysis and which methods do not?

Use present value: Net present value method, and internal rate of return method. Do NOT use present value: Average rate of return method and cash payback method.

Difference between period cost and product cost.

Period costs: Those costs that are used up in generating revenue during the current period and that are not involved in manufacturing a product, such as selling, general and administrative expenses. Product costs: The three components of manufacturing costs: direct materials, direct labor, and factory overhead costs.

What is a sunk cost?

The cost that has been incurred i the past, cannot be recouped, and are not relevant to future decisions.

Differential income (loss)

The difference between the differential revenue and differential costs.

Identify the opportunity cost.

The revenue that is forgone from an alternative use of an asset, such as cash.