Ch 11 Flashcards
(27 cards)
Relevant costs, relevant revenues
Expected future costs
Expected future revenues
Decision model
Formal method of making choice that involves
Both quantitative and qualitative analysis
2 requirements to be considered a relevant cost or relevant revenue?
Occur in the future
Differ among alternative courses of action
Sunk costs, why they are?
Historical costs
Past costs are unavoidable + can’t be changed no matter
What action is taken
Quantitative factors, examples?
Outcomes measured in numerical terms
Ex. Costs of direct materials, direct labor,
Direct manufacturing and marketing
Qualitative factors, example?
Outcomes that are difficult to measure accurately in
Numerical terms
Ex. Employee morale
One time only special orders
Have no long run implications
Business function costs, examples?
Sum of All fixed and variable costs in business fct.
Of value chain
Ex. Manufacturing costs, marketing costs
Full cost of the product
Sum of all variable and fixed costs in all business fcts.
Of value chain
Potential problems in relevant cost analysis 3?
1 incorrect general assumptions
2 inclusion of irrelevant costs
3 losing sight of total amounts, just focusing on unit amounts
Outsourcing
Purchasing goods and services from outside vendors
Rather than producing them from w/in the organization
Insourcing
Producing goods or providing services within the
Organization
Make or buy decisions
Decisions on whether producer goods or services
Will insource or outsource
Incremental cost, incremental revenue
Additional total cost incurred for activity
Additional total revenue from an activity
Differential cost, differential revenue
Difference in total cost btw 2 alternatives
Difference in total revenue btw 2 alternatives
Opportunity cost
Contribution to operating income that’s forgone by not
using limited resource in its next best alternative use
Product mix decisions
Decisions about which products to sell and in
What quantities
Book value
Original cost - accumulated depreciation
Equipment replacement decisions, is book value relevant?
No
When resources are constrained, how should a manager which of multiple products to produce and sell?
Select product that yields highest CM per unit of
Constraining or limited resource
In deciding to add or drop customers or add or discontinue branch offices/segments, what should managers focus on?
Focus only on costs that will change and any opportunity
Costs
How should managers take into account allocated overhead costs?
Managers should ignore allocated overhead costs
How can conflicts arise between decision model used by manager and the performance evaluation model used to evaluate the manager?
Common inconsistency tells managers take a multiple yr.
View in decision making
but judge performance only on basis of current year’s
operating income
Steps in solving linear programming problem 3?
1 determine objective function
2 specify the constraints
3 compute optimal solution
