CH #13 - Differential Analysis: The Key to Decision Making

Joint costs...

ARE RELEVANT in the decision to sell a product at the split-off point or to process the product further ARE IRRELEVANT in decisions regarding what to do with a product after split-off

Opportunity costs:

DO NOT represent actual dollar outlays ----- rather they represent economic benefits that are forgone as a result of pursuing some course of action.

TRUE OR FALSE: Some decisions only have one alternative.

FALSE

TRUE or FALSE: Opportunity costs are NOT found in accounting records because they are not relevant to decisions.

FALSE

Anything that prevents you from getting more of what you want is a:

constraint

When a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a:

constraint

One of the great dangers in allocating common _____ costs is that such allocations can make a product line look less profitable than it really is.

fixed

Two or more products that are produced from a common input are known as _______ products.

joint

Two or more products produced from a common input are called:

joint products

Determining whether to carry out an activity in the value chain internally or use a supplier is a ______ decision.

make or buy

Joint costs incurred prior to the split-off point are ______ relevant in decisions regarding what to do from the split-off point forward.

never

The potential benefit given up when selecting one alternative over another is a(n) ______ cost.

opportunity

Costs & benefits that ALWAYS differ between alternatives are ______ costs & benefits.

relevant

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

special

A one-time sale that is not considered part of the company's normal ongoing business is referred to as a:

special order decision.

A cost that has already been incurred and cannot be avoided regardless of what a manager decides to do is referred to as a(n) ______ cost.

sunk

Costs that have no impact on future cash flows and are irrelevant to decisions are ______ costs.

sunk

If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is:

the profit from the best alternative use of the resource

When demand for products exceeds the production capacity, a(n) (1)___________ (2)___________ - (3)__________ decision must be made.

(1) volume (2) trade (3) off

Irrelevant costs include:

- future costs that do not differ between alternatives - sunk costs

TRUE or FALSE: Depreciation of existing assets is relevant to decisions.

TRUE

TRUE or FALSE: Intermediate products are NOT yet finished

TRUE

Joint costs are used to:

describe the costs incurred up to the split-off point.

An increase in cost between two alternatives is a(n) _____ cost.

incremental/differential

If a company has a resource that could be used for something else, the ______ cost is the profit that could be derived from the best alternative use of the resource.

opportunity

When planning a trip and deciding whether to drive or fly, the ______ is a sunk cost and should be ignored.

original cost of the car

Synonyms for differential costs include:

- avoidable cost - incremental cost

When deciding whether to fly or take the train on a trip, the cost of putting your pet in a boarding facility while you are away is a(n) ______ cost.

- irrelevant

A company must make a volume trade-off decision when they ________.

- must trade off units of one product for units of another due to limited production capacity - do not have enough capacity to satisfy the demand for all of its products

The first step in decision making is to ______.

-define the alternatives

Which of the following can make a product line look LESS profitable than it really is?

allocated common fixed costs

An increase in cost between two alternatives is a(n) ______ cost.

incremental/differential

Future costs and benefits that do not differ between alternatives are ______ costs to the decision-making process.

irrelevant

When deciding whether to drive your car or take a train to a destination, the costs for your car insurance and driver's license are ______ costs.

irrelevant costs

Joint costs are...

irrelevant in decisions regarding what to do with a product after split-off

A decision to carry out one of the activities in the value chain internally rather than to buy externally from a supplier is a ______ decision.

make or buy

Differential revenue is an example of a(n) ______ benefit.

relevant

When making a decision only ______ costs and benefits should to be included in the analysis.

relevant