Chapter 6

Split off point

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

Key Concept #3

The key to effective decision making is differential analysis - focusing on the future costs and benefits that differ between alternatives. Everything else is irrelevant and should be ignored.

joint products

Two or more products that are produced from a common input

Key concept #4

Sunk costs are always irrelevant when choosing among alternatives.

Relevant Benefit

A benefit that should be considered when making decisions.

Relevant costs

A cost that should be considered when making decisions

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.

Differential cost

A future cost that differs between any two alternatives

Bottleneck

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

Joint costs

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

Key Concept #1

Every decision involves choosing from among at least two alternatives. Therefore, the first step in decision making is to define the alternatives being considered. Ex: A company deciding whether to make a component part or buy it from an outside supplier, the alternatives are make or buy thecomponent part

Key Concept #5

Future costs and benefits that do not differ between alternatives are irrelevant to the decision-making process. Ex. assume that you plan to buy a Papa John's pizza 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 irrelevant when choosing between the theater and the rental

Differential Revenue

Future revenue that differs between any two alternatives

Incremental Cost

Is an increase in cost between to alternatives Ex. if you are chossing between buying the standard model or the deluxe model of your favorite automobile, the cost of the upgrades in the deluxe model are incremental cost

opportunity cost

Is the potential benefit that is given up when one alternative is selected over another. Ex. If you were considering giving up a high-paying summer job to travel overseas, the forgone wages would be an opportunity cost of traveling abroad

Key Concept #2

Once you have defined the alternatives, you need to identify the criteria for choosing among them. The key to choosing among alternatives is distinguishing between relevant and irrelevant costs and benefits. Irrelevant costs and irrelevant benefits should be ignored when making decisions

Key Concept #6

Opportunity costs also need to be considered when making decisions

Special-Order

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

Constraint

anything that prevents you from getting more of what you want

Avoidable cost

is a cost that can be eliminated, in whole or in part, by choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs.

Vertical Integration

is a cost that can be eliminated, in whole or in part, by choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs.

Avoidable cost

is a cost that can be eliminated by choosing one alternative over another Ex. Assume that you have decided to watch a movie tonight; however you are trying to chosse between two alternatives-going to the movie theater or renting a movie. The cost of the ticket to get into the movie theater is an avoidable cost

Sunk Costs

is a cost that has already incurred and cannot bee changed regardless of what a manager decides to do