ACCT 2200 Chapter Notes - Chapter 12: The Make (Band), Sunk Costs, Business Process
5 May 2015
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12 differential analysis: the key to decision making. It is important to compare the costs and benefits of one alternative with that of another alternative. By focusing on the costs and benefits that differ between the alternatives, it is much easier to arrive at a conclusion. Costs that differ between alternatives are called relevant costs. Benefits that differ between alternatives are called relevant benefits. An avoidable cost is a cost that can be eliminated by choosing one alternative over another. A sunk cost is a cost that has already been incurred and cannot be avoided regardless of what a manager decides to do. Only those costs and benefits that differ between alternatives are relevant in a decision. If the relevant costs and benefits are identified, it saves decision makers tremendous amounts of time and effort: second, bad decisions can easily result from erroneously including irrelevant costs and benefits when analyzing alternatives.
