ACCT 2230 Chapter 12: Chapter 12 Managerial Accounting Notes

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17 Dec 2011

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Relevant cost: those costs that differ among the alternatives under consideration. Four cost terms are applicable in this chapter: differential, incremental, opportunity & sunk costs. Only those costs & benefits that differ in total between alternatives are relevant in a decision. If a cost will be he same regardless of the alternative, then the decision has no effect on cost and it can be ignored. Avoidable cost: cost that can be eliminated in whole or in part by choosing one alternative over another. Avoidable costs are relative costs, unavoidable costs are irelevant ones. Sunk cost: a cost that has already been incurred and cant be avoided therefore its irrelevant. Differential cost: avoidable cost, differential cost and incremental cost are all interchangeable terms. Costs that are relevant n one decision situation aren"t necessarily relevant in others. In each decision, manager must examine the data at hand & isolate the relevant costs. Adding & dropping product lines & other segments.

Related Questions

Costs which are always relevant in decision making are those costs which are:

	a.	variable
	b.	avoidable
	c.	sunk
	d.	fixed

Nicklin Corporation is considering two alternatives, code-namedM and N. Costs associated with the alternatives are listedbelow:

	Alternative M		Alternative N
Supplies costs	$	50,000	$	53,000
Power costs	$	34,000	$	34,000
Inspectioncosts	$	14,000	$	21,500
Assembly costs	$	27,000	$	16,000

Required:

a.	Which costs are relevant and which are not relevant in thechoice between these two alternatives?

b.	What is the differential cost between Alternative M andAlternative N?

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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.

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ACCT 2230 Chapter 12: Chapter 12 Managerial Accounting Notes

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