ACCT 2230 Chapter Notes - Chapter 12: Management Accounting, Vertical Integration
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Chapter 12: Relevant Costs for Decision Making ACCT*2230
Relevant cost: a cost 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 (relevant or differential) costs: any cost that can be eliminated (in whole or in
part) by choosing one alternative over another in a decision-making situation.
*AVOIDABLE costs are RELEVANT costs.
*UNAVOIDABLE costs are IRRELEVANT costs.
Two Costs That Are Always Unavoidable:
1. Sunk Costs
2. Future Costs that do not differ between the alternatives (i.e; car lease payments)
Keep or Drop a Product/Segment?
CM lost (all products/segments) > fixed costs avoided + CM gained
CM lost (all products/segments) < fixed costs avoided + CM gained
Make or Buy Decision
A decision as to whether an item should be produced internally or purchased
from an outside supplier
Vertical integration: the involvement of 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
Special order: a one-time order that is not considered part of the company’s normal
Two or more items that are produced from a common input.
Joint Product Costs
-costs that are incurred up to the split-off point in producing joint products
Split-off point: that point in the manufacturing process where some or all of the
joint products can be recognized as individual products
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