ACC 202 Chapter Notes - Chapter 12: Sunk Costs, Opportunity Cost, Earnings Before Interest And Taxes
Document Summary
Relevant costs and relative benefits should be considered when making decisions. Irrelevant costs and irrelevant benefits should be ignored when making decisions. A future cost that differs between any two alternatives is known as a differential cost. Future revenue that differs between any two alternatives is known as differential revenue. An incremental cost is an increase in cost between two alternatives. An avoidable cost is a cost that can be eliminated by choosing one alternative over another. Chapter 12: differential analysis-the key to decision making. Number 1: every decision involves choosing from among at least two alternatives. Therefore, the first step in decision-making is to define alternatives. Number 2: once you have defined the alternatives, you need to identify the criteria for choosing among them. Number 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.