Chapter 12

Relevant benefit

A benefit that differs between alternatives in a decision. Differential revenue is a relevant benefit.

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.

Sunk cost

A cost that has already been incurred and that cannot be changed by any decision made now or in the future

Sell or process further decision

A decision as to whether a joint product should be sold at the split-off point or sold after further processing.

Make or buy decision

A decision concerning whether an item should be produced internally or purchased from an outside supplier.

Relevant cost

A difference in cost between any two alternatives. Synonyms are avoidable cost, differential cost, and incremental cost

Differential cost

A difference in cost between two alternatives. Also see Incremental cost.

Constraint

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

Bottleneck

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

Special order

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

Relaxing (or elevating) the constraint

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

Joint costs

Costs that are incurred up to the split-off point in a process that produces joint products.

Split-off point

That point in the manufacturing process where some or all of the joint products can be recognized as individual products

Differential revenue

The difference in revenue between two alternatives.

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.

Opportunity cost

The potential benefit that is given up when one alternative is selected over another.

Joint products

Two or more products that are produced from a common input