Chapter 11 ACCT 201B
When considering decision alternatives, only relevant costs are included when using ____ cost approach
Differential
What is the key to effective decision making?
Differential analysis
Average costs are...
Often misleading and contain sunk costs
Which of the following should not be included in the analysis when making a decision? Multiple select question. Sunk costs Non-differential future costs Avoidable costs Opportunity costs
Sunk cost and Non-differential future costs
A set of activities ranging from development to production to after-sales service is called
The value chain
Do average cost include sunk costs?
Yes, average cost include many costs that are sunk or irrelevant
What do you call a cost that can be eliminated by choosing one alternative over another?
Avoidable, relevant or differential. For example, if you are choosing between buying the standard or deluxe model of your car, the costs of the upgrades contain incremental costs. An avoidable cost is a cost that can eliminated by choosing one alternative over another.
What is the key to effective decision making?
Differential analysis- focusing on the future costs and benefits that differ between the alternatives.
What is the first step in decision making?
Every decision involves choosing from at least two alternatives. Therefore, the first step in decision making is to define the alternatives being alternatives.
A business segment should only be dropped if a company can save more in a____ costs than it loses in CM.
Fixed
When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative ____ ____ showing the effects of either keeping or dropping the product line.
Income statements
What are synonyms for differential costs?
Incremental, avoidable. A future cost that differs between any two alternatives is known as differential costs. Differential costs are relevant costs. Future revenue that differs between two alternatives is differential revenue.
Future costs and benefits that do not differ between alternatives are what costs to decision-making process.
Irrelevant. Future costs and benefits that do not differ between alternatives are irrelevant to the decision-making process. So, continuing with the movie example, assume that you plan to buy a Domino'spizza after watching a movie. If you are going to buy the same pizza regardless of your movie-watching venue. The cost of the pizza is not a sunk cost because it has not yet been incurred. Nonetheless, the cost of the pizza is irrelevant to the choice of venue because it is a future cost that does not differ between the alternatives.
What are cost and benefits that should be ignored when making decisions?
These are irrelevant costs and benefits. The key to choose between alternatives are distinguishing relevant and irrelevant costs and benefits. Irrelevant cost and benefits should be ignored when making decisions because it is a waste of time and effort, and bad decisions can result from including irrelevant costs and benefits when analyzing alternatives.
When planning a road trip, the ______ is a sunk cost and should be ignored.
cost of parking at the motel where one will be staying Reason: A sunk cost is a cost that has already been incurred and cannot be avoided. Cost of parking is a future cost. original cost of the car cost of gasoline for the trip Reason: A sunk cost is a cost that has already been incurred and cannot be avoided. Gasoline is a future cost. cost of car repairs and maintenance Reason: Repairs and maintenance change based on miles driven.
