ACCT 2230 Lecture Notes - Lecture 10: Management Accounting, Weighted Arithmetic Mean, Net Present Value

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Relevant cost: cost that differs among the alternatives in a particular decision & will be incurred in future. (synonymous with avoidable cost & differential cost in managerial accounting) Avoidable cost: cost that can be eliminated (in whole/in part) by choosing one alternative over another. (incremental/differential are synonyms) *unavoidable costs are irrelevant costs, avoidable costs are relevant costs* Sunk costs & future costs that do not differ between alternatives are not relevant in decision! Relevant cost analysis: eliminate costs and bene ts that do not differ between alternatives, use the remaining costs & bene ts that differ between alternatives in making the decision. The costs that remain are the differential/avoidable costs. * costs that are relevant in one decision situation may not be relevant in another context * Differential cost approach: way to identify relevant costs (differential cost: difference between the cost of 2 alternative decisions or chance in output levels)

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