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Lecture

Chapter 12.docx

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Department
Administrative Studies
Course
ADMS 2510
Professor
Alison Beavis
Semester
Winter

Description
Chapter 12 Relevant cost: A cost that differs among the alternatives in a particular decision and will be incurred in the future. In managerial accounting, this term is synonymous with avoidable cost and differential cost. Avoidable cost: Any cost that can be eliminated (in whole or in part) by choosing one alternative over another in a decision-making situation. In managerial accounting, this term is synonymous with relevant cost and differential cost.  Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs.  In managerial accounting, the terms avoidable cost, differential cost, incremental cost, and relevant cost are often used interchangeably. KEEP OR DROP A PRODUCT/SEGMENT Relevant Costs and Benefits  Contribution margin (CM) lost if dropped  Fixed costs avoided if dropped  CM lost/gained on other products/segments Irrelevant Costs  Allocated common costs  Sunk costs Decision Rule: Keep if CM lost (all products/segments) > fixed costs avoided + CM gained (other products/segments) Drop if CM lost (all products/segments) < fixed costs avoided + CM gained (other products/segments) Vertical integration: The involvement by a single company in more than one of the steps of the value chain from production of basic raw materials to the manufacture and distribution of a finished product. Make or buy decision: A decision as to whether an item should be produced internally or purchased from an outside supplier. MAKE OR BUY Relevant Costs  Incremental costs of making the product (variable and fixed)  Opportunity cost of utilizing space to make the product  Outside purchase price Irrelevant Costs  Allocated comm
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