ACT202 Chapter Notes - Chapter 7: Decision Rule, Sunk Costs, Insourcing
ACT 202 Management Accounting
Decision making and relevant information
Information and the decision process
• A decision model is a formal method of making a choice, often involving both quantitative
and qualitative analyses.
• Managers often use some variation of the five-step decision-making process.
Relevant costs and relevant revenues:
• relevant information has two characteristics it occurs in the future it differs among the ‒ ‒
alternative courses of action
• relevant costs – expected future costs
• relevant revenues – expected future revenues.
Qualitative and quantitative relevant information Decision outcomes fall into two broad
categories:
• quantitative factors are outcomes that are measured in numerical terms
• qualitative factors are
outcomes that are difficult to measure accurately in numerical terms ‒
are just as important as quantitative factors even though they are difficult to measure.‒
The concept of relevance Irrelevance:
• historical costs are past costs that are irrelevant to decision making
• they are also called sunk costs.
An illustration of relevance: choosing output levels Terminology:
• incremental cost – the additional total cost incurred for an activity
• differential cost – the difference in total cost between two alternatives
• incremental revenue – the additional total revenue from an activity
• differential revenue – the difference in total revenue between two alternatives.
One-time-only special orders:
• one type of decision that affects output levels is onetime-only special orders, and whether to
accept or reject them when there is idle production capacity, and whether the special orders
have long-run implications
• decision rule: does the special order generate additional operating profit?
• yes – accept
• no – reject
• compares relevant revenues and relevant costs to determine profitability.
find more resources at oneclass.com
find more resources at oneclass.com
