ACCT 212 CH.7
Avoidable Cost
A cost that can be avoided by choosing one decision alternative instead of another.
Capacity
A measure of the limit placed on a specific resource.
Constrained Resource
Anything that is needed to operate the business, such a s cash, employees, machines, or facilities.
Common Fixed Costs
Are shared by multiple segments and thus will be incurred even if a segment is eliminated.
Direct Fixed Costs
Can be attributed to a specific segment of the business.
Differential Costs or Incremental Costs
Costs that differ between decision alternatives are also called
Sunk Costs
Costs that were incurred in the past, are not relevant because they will not change based on a future decision.
Machine hours, direct materials, and factory space
Examples of a constrained resource
Incremental Analysis or differential analysis
Focuses on the factors that will change, or differ between the decision alternatives.
Bottleneck
In the short run, managers can minimize profit by prioritizing products or customers based on the amount of contribution margin generated by the most constrained resource.
Idle or Excess Capacity
More than enough resources to satisfy demand.
Relevant cost
Only those costs that change or differ between the decision alternatives are relevant for decision making. Has the potential to influence a specific decision and should therefore be considered in the analysis. It must occur in the future and differ between decision alternatives.
Complementary Products
Products that are used together.
Substitute Products
Products that can be used in place of one another
Special order decisions
Require managers to decide whether to accept or reject an order that is outside the scope of normal sales.
Segment Margin
Sales revenue less all costs that are directly attributable to the segment, including variable costs and direct fixed costs.
Irrelevant
Suck costs are
Incremental analysis or differential analysis
The decision making approach in which a manger considers only costs and benefits that differ for alternatives is called...
Opportunity Costs
The forgone benefit of choosing one decision alternative over another.
Full Capacity
The limit on one or more of its resources has been reached, and making the choice do one thing means giving up the opportunity to do something else.
Decision Alternatives
The next step after Identifying the problem. This step is to determine the possible solutions.
Irrelevant Costs
Those that will not influence a decision, either because they have already been incurred or because they do not differ between the decision alternatives.
The cost in not avoidable
When making a one time special order decision a company can ignore fixed overhead because
Contribution margin per unit of the constrained resource
When resources are constrained, managers should prioritize products in order to maximize
Make or buy decision or insourcing vs. outsourcing decisions
Whether to preform a particular activity or function in house or to purchase it from an outside supplier.
Sell or process further decision
Whether to sell a product as is or continue to refine it so that it can be sold for a higher price.
Operating at full capacity
Which of the following causes opportunity costs to become relevant to management decisions?
The common fixed costs allocated to that product line
Which of the following costs is not likely to be completely eliminated by a decision to drop a product line?
Share of the rent on the factory. It will be incurred regardless and therefore irrelevant.
Which of the following costs would not be relevant to the decision of whether to make a part internally or but it form an outside supplier?
The monthly cost of liability insurance on your vehicle
Which of the following costs would not be relevant to the decision of whether to take the bus or drive your vehicle to school for a semester? Assume that you continue to own your own vehicle under either alternative.
Contact competitors who have made similar decisions
Which of the following is not a step of management decision making process
Cost per unit
Which of the following is not an important qualitative factor?
