Relevant Costing Copilot Flashcards
(45 cards)
What is incremental analysis?
The process of evaluating financial data that change under alternative courses of action ## Footnote Also called differential analysis; focuses on relevant future costs and benefits.
What are relevant costs?
Future costs that differ between alternatives ## Footnote Only costs that change depending on the decision are considered relevant.
What are differential costs?
The difference in total cost between two alternatives ## Footnote Includes both cost increases (increments) and decreases (decrements).
What are avoidable costs?
Costs that can be eliminated by choosing one alternative over another ## Footnote Always relevant to the decision.
What are opportunity costs?
The benefit lost by choosing one option over another ## Footnote Not recorded in accounting books but crucial for decision-making.
What are sunk costs?
Past costs that cannot be changed by any future decision ## Footnote Always irrelevant in decision-making.
What are joint costs?
Costs incurred before the split-off point in joint production ## Footnote Irrelevant in sell-or-process-further decisions.
What is the split-off point?
The stage where joint products become separately identifiable ## Footnote Beyond this point, further processing costs are relevant.
What is the decision rule for special orders?
Accept if incremental revenue exceeds incremental cost and regular sales are unaffected ## Footnote Fixed costs are usually irrelevant unless they change.
What is the decision rule for make-or-buy decisions?
Choose the option with the lower relevant cost ## Footnote Consider variable costs, avoidable fixed costs, and opportunity costs.
What is the decision rule for sell-or-process-further decisions?
Process further if incremental revenue exceeds further processing costs ## Footnote Joint costs are sunk and irrelevant.
What is the decision rule for retain-or-replace equipment?
Replace if cost savings exceed the cost of new equipment ## Footnote Book value of old equipment is a sunk cost.
What is the decision rule for eliminating a segment?
Eliminate if avoidable costs exceed avoidable revenues ## Footnote Allocated fixed costs are usually irrelevant.
What is the decision rule for scarce resource allocation?
Prioritize products with highest contribution margin per unit of constraint ## Footnote Maximizes profit under limited resources.
What is the role of accounting in decision-making?
To evaluate alternatives and review results ## Footnote Most useful in steps 2 and 4 of the decision-making process.
If a cost is unavoidable what does that imply?
It is irrelevant to the decision ## Footnote Unavoidable costs remain regardless of the alternative chosen.
If a cost is avoidable what does that imply?
It is relevant to the decision ## Footnote Avoidable costs differ between alternatives and can be eliminated.
If a cost is sunk what does that imply?
It is irrelevant to future decisions ## Footnote Sunk costs are past costs that cannot be recovered.
If a company has idle capacity what is the opportunity cost of using it?
Zero ## Footnote No alternative use means no benefit is foregone.
If a company is at full capacity what is the opportunity cost of accepting a special order?
Lost contribution margin from regular sales ## Footnote Accepting the order may displace profitable sales.
If a special order price covers variable cost but not fixed cost should it be accepted?
Yes, if fixed costs are irrelevant and capacity exists ## Footnote Contribution margin is positive and fixed costs are unaffected.
If a product’s further processing cost exceeds incremental revenue what should be done?
Sell at split-off point ## Footnote Further processing would reduce profit.
If a product’s further processing revenue exceeds cost what should be done?
Process further ## Footnote Increases total profit.
If a segment’s avoidable costs exceed its revenues what should be done?
Eliminate the segment ## Footnote Continuing would reduce overall profit.
