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Lecture

Textbook notes

2 Pages
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Department
Accounting
Course Code
ACC 410
Professor
Keith Whelan

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Chapter 4 Relevant Costs for Nonroutine Operating Decisions
Process for Making Nonroutine Operating Decisions
1. Identify the type of decision to be made
2. Identify the relevant quantitative analysis technique(s)
3.Apply the relevant quantitative analysis technique(s)
4. Identify and analyze the qualitative factors
5.Consider the quantitative and qualitative information and make a decision
Identify and Apply Relevant Quantitative Analysis Techniques
-Quantitative information numerical information that is available for addressing a
problem
-To be relevant information, cash flows must
(1) arise in the future
(2) vary with the action taken
-Irrelevant cash flows are ignored
-Sunk costs are always irrelevant to decision involving cash flow that arise in the
future
-Analysis techniques require input data
Data for some input variables will be known and for other input variables
estimates will be required
Identify and Analyze Qualitative Factors
-Qualitative information factors that are not valued in numerical terms is vital to
good decision-making
incorporated into our analysis using judgement
Consider Quantitative and Qualitative Information to Make a Decision
-After appropriate quantitative techniques have been applied, decision alternative
with the highest dollar contribution to organization is identified
Applications of Nonroutine Operating Decisions
Special Orders
Keep or drop decisions
Insource or outsource (make or buy) decisions
Constrained resources
Product emphasis involving multiple resource constraints and multiple products
Summary of Information used and decision rule for special order
Relevant Costs and BenefitsIrrelevant CostsDecision Rule
Incremental revenues
from the order
Incremental costs
(including variable and
fixed costs) of filling the
Allocated common
costs
Sunk costs
Accept if
incremental revenues >
total relevant costs
Reject if:
Incremental revenues <
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Description
Chapter 4 Relevant Costs for Nonroutine Operating Decisions Process for Making Nonroutine Operating Decisions 1. Identify the type of decision to be made 2. Identify the relevant quantitative analysis technique(s) 3. Apply the relevant quantitative analysis technique(s) 4. Identify and analyze the qualitative factors 5. Consider the quantitative and qualitative information and make a decision Identify and Apply Relevant Quantitative Analysis Techniques - Quantitative information numerical information that is available for addressing a problem - To be relevant information, cash flows must (1) arise in the future (2) vary with the action taken - Irrelevant cash flows are ignored - Sunk costs are always irrelevant to decision involving cash flow that arise in the future - Analysis techniques require input data Data for some input variables will be known and for other input variables estimates will be required Identify and Analyze Qualitative Factors - Qualitative information factors that are not valued in numerical terms is vital to good decision-making incorp
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