ACC 312 Study Guide - Midterm Guide: Sunk Costs, Cash Flow, Total Absorption Costing

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greenwalrus59

29 Nov 2017

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Relevant costs, or incremental or differential costs, arise as a direct consequence of a decision, which may differ between alternative options. Accounting information, for example that used in absorption costing, may be different from relevant information used in decision-making. Relevant information may relate to costs or revenues; compared with accounting information, it may be qualitative as well as quantitative. Relevant costs are costs that arise as a direct consequence of a decision. Relevant costs are future costs not past costs. A decision is about the future and it cannot alter what has been done already. A cost incurred, or committed, in the past is irrelevant to any decision that is made now. Relevant costs are cash flows not accounting costs. All decisions are assumed to maximise the benefit of the shareholders. The time value of money impacts on longer-term decisions but all short-term decisions are assumed to improve shareholder wealth if they increase net cash flows.

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Tactical decision making

Tactical decision making means choosing among alternatives withan immediate or limited end in view. For example, a company mayaccept a special order for less than the normal selling price touse idle capacity. Tactical decisions tend to be short-runin nature; however, it should be emphasized that short-rundecisions often have long-run consequences. A general tacticaldecision-making model is outlined here.

1.	Recognize and define theproblem.
2.	Identify possible alternativesolutions to the problem, and eliminate any unfeasiblealternatives.
3.	Identify the costs and benefitsassociated with each feasible alternative. Eliminate the costs andbenefits that are not relevant to the decision.
4.	Compare the relevant costsand benefits for each alternative.
5.	Assess qualitative factors.
6.	Select the alternative with thegreatest overall benefit.

Identifying and comparing relevant costs and revenues is theheart of the tactical decision model. Relevant costs (revenues) arefuture costs (revenues) that differ across alternatives. (Revenuesare treated in the same way as costs, so we will simplify thediscussion by referring to costs.) All decisions relate to thefuture; so, only future costs can be relevant. In addition, thecost must differ from one alternative to another. If a future costis the same for more than one alternative, it has no effect on thedecision. Such a cost is an irrelevant cost.

Assume that Reeves Company is considering accepting a specialorder for $25 per unit when the normal selling price is $30 perunit. Reeves has enough excess capacity to make the order withoutdisplacing normal sales. The alternatives facing Reeves Company are(Select "Yes" for the statements that are applicable and "No" forthe items that do not apply):

Accept the special order.	- Select your answer -YesNoItem1
Reject the special order.	- Select your answer -YesNoItem2
Sell normal sales for $25 perunit.	- Select your answer -YesNoItem3

Choose which of the following are relevant in deciding whetheror not to accept the special order. (Select "Yes" for thestatements that are applicable and "No" for the items that do notapply)

$25 price.	- Select your answer -YesNoItem4
$30 normal price.	- Select your answer -YesNoItem5
Variable cost of making the unitsin the special order.	- Select your answer -YesNoItem6
Depreciation on factory equipmentused in making the special order units.	- Select your answer -YesNoItem7
Increased property taxes on thefactory building which are due while the special order would bemade.	- Select your answer -YesNoItem8

While cost and revenue information is important, otherinformation may be needed to make an informed decision. Thesenon-financial factors are termed qualitative and are often relevantin decision making. For example, in deciding whether to make acomponent in-house or purchase it from an outside supplier, thecompany may consider any difference in quality or in responsivenessto the company's production schedules.

goldmoose557

1. Which of the following costs is not relevant in aspecial-order decision?
A. Direct labor
B. Direct materials
C. Variable overhead
D. Fixed overhead

2. Costs that change across decision alternatives are
A. accounting costs.
B. activity-based costs.
C. incremental costs.
D. capital costs.

4. The potential benefit of one alternative that is lost bychoosing another is known as a(n):
A. Sunk cost
B. Out-of-pocket cost
C. Differential cost
D. Opportunity cost

5. A cost that cannot be avoided or changed because it arisesfrom a past decision, and is irrelevant to future decisions, iscalled a(n):
A. Uncontrollable cost
B. Incremental cost
C. Opportunity cost
D. Sunk cost

6. An additional cost that is incurred only if a particularaction is taken is a(n):
A. Period cost
B. Pocket cost
C. Discount cost
D. Incremental cost

7. The payback period:
a. Is the length of time necessary to recover the entire cost of aninvestment from its resulting annual net cash flow.
b. Is the length of time necessary to recover the entire cost of aninvestment from its resulting annual net income.
c. Takes into consideration the profitability of an investment overits entire life, but ignores the timing of its future cashflows.
d. Takes into consideration both the profitability of an investmentover its entire life and the timing of its future cash flows.

emeralddeer628

Match each of the six following terms with the phrase that mostclosely describes it. Each answer may be used only once. _____ 1.Direct costs _____ 2. Fixed costs _____ 3. Incremental costs _____4. Enterprise resource planning system _____ 5. Noncontrollablecosts _____ 6. Opportunity costs (A) Costs that increase ordecrease in total in response to increases or decreases in thelevel of business activity (B) Costs that are directly traceable toa product, activity, or department (C) Costs that a manager caninfluence (D) The difference in costs between decision alternatives(E) Costs incurred in the past that are not relevant to presentdecisions (F) Costs that cannot be influenced by a manager (G)Financial plans prepared by management accountants (H) Value of thebenefits foregone when one decision alternative is selected overanother (I) Costs that cannot be directly traced to a product,activity, or department or are not worth tracing (J) Costs that donot change in total with changes in the level of business activity(K) Systems that prepare a master production system and all of thesupport across the company

ochremule554

ACC 312 Study Guide - Midterm Guide: Sunk Costs, Cash Flow, Total Absorption Costing

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