Accounting Chapter 12 key terms

Opportunity Cost

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Differential Costs

Costs (revenues) that differ among alternatives are differential costs (revenues).

Sunk Cost

Costs that have already been incurred and cannot be changed now or in the future.

Identifying Relevant Costs Components

Differential costs and benefits are relevant. Avoidable costs are relevant costs. An avoidable cost can be eliminated, in whole or in part, by choosing one alternative over another. When an opportunity cost exists in a decision situation, it is relevant.

How to choose an alternative

Identify relevant costs and benefits/revenues. Compare different alternatives by examining differences in total relevant revenues and costs between the alternatives. Appropriate weight should be given to qualitative factors and quantitative nonfinancial factors.

Identifying Relevant Costs

Only those costs and benefits that differ in total between alternatives are relevant in a decision.

Not Relevant Costs

Sunk costs. Future costs that do not differ between the alternatives

Opportunity Cost

The potential benefit that is foregone when one alternative is selected over another

Segment Margin

computed by subtracting CM, from traceable fixed expenses. The segment margin of a segment is computed by deducting the traceable fixed costs of a segment from the segment's contribution margin. It is the best gauge of the long run profitability of a segment.

Add or drop Segment

drop the segment only if profit would increase. This would only happen if the fixed cost savings exceed the lost contribution margin