accounting chapter 7

Direct fixed cost

A cost attributable to a specific division that does not change based on volume

Common fixed costs

A cost shared by multiple divisions that will not change even if one division is eliminated

Constrained resource

A limited supply of facilities

Capacity

A measure of the limit placed on a specific resource

Complementary products

A product that can be used in conjunction with another product

Substitute products

A product that can be used in place of another

Opportunity costs

Benefits given up when one alternative is chosen over another

Avoidable costs

Costs that can be avoided by choosing one option over another

Differential costs

Costs that change across decision alternatives

Sunk costs

Costs that have already been incurred - Costs that are always irrelevant to management decisions

Incremental analysis

Examination of alternatives focusing on costs that change between alternatives

Full capacity

Exists when a company has met its limit on one or more resources

Excess capacity

Exists when a company has not yet reached the limit on its resources

Identify the decision problem

First step of the management decision-making process

Bottleneck

Resource that is insufficient to meet the demands placed on it

Segment margin

Sales revenue less all costs that are directly attributable to that division

determine the decision alternatives

Second step of the management decision-making process

Special-order decision

Short-term management decision made using differential analysis - Management decision in which fixed manufacturing overhead is ignored as long as there is enough excess capacity to meet the order

Keep-or-drop decision

Short-term management decision made using differential analysis - Management decision in which lost revenue is compared to the reduction of costs to determine the overall effect on profit

Make-or-buy decision

Short-term management decision made using differential analysis - Management decision in which relevant costs of making a product internally are compared to the cost of purchasing that product

Evaluate the costs and benefits of alternatives

Step 3 of the management decision-making process

Idle capacity

When the limit of resources has not yet been reached

relevant costs

have the potential to influence a decision - occurs in the future, differs between decision alternatives

make the decision

step 4 of the management decision-making process

review the results of the decision

step 5 of the management decision-making process

irrelevant costs

those that will not influence a decision - Costs that have been incurred in the past (sunk costs), Costs that are the same regardless of the alternative chosen