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
