cost12ism_11 - CHAPTER 11 DECISION MAKING AND RELEVANT...

CHAPTER 11
DECISION MAKING AND RELEVANT INFORMATION
11-1 The five steps in the decision process outlined in Exhibit 11-1 of the text are
1. Obtain information
2. Make predictions about future costs
3. Choose an alternative
4. Implement the decision
5. Evaluate performance
11-2 Relevant costs are expected future costs that differ among the alternative courses of
action being considered. Historical costs are irrelevant because they are past costs and, therefore,
cannot differ among alternative future courses of action.
11-3 No. Relevant costs are defined as those expected future costs that differ among
alternative courses of action being considered. Thus, future costs that do not differ among the
alternatives are irrelevant to deciding which alternative to choose.
11-4 Quantitative factors are outcomes that are measured in numerical terms. Some
quantitative factors are financial––that is, they can be easily expressed in monetary terms. Direct
materials is an example of a quantitative financial factor. Qualitative factors are outcomes that
are difficult to measure accurately in numerical terms. An example is employee morale.
11-5 Two potential problems that should be avoided in relevant cost analysis are
(i) Do not assume all variable costs are relevant and all fixed costs are irrelevant.
(ii) Do not use unit-cost data directly. It can mislead decision makers because
a. it may include irrelevant costs, and
b. comparisons of unit costs computed at different output levels lead to erroneous
conclusions
11-6 No. Some variable costs may not differ among the alternatives under consideration and,
hence, will be irrelevant. Some fixed costs may differ among the alternatives and, hence, will be
relevant.
11-7 No. Some of the total unit costs to manufacture a product may be fixed costs, and, hence,
will not differ between the make and buy alternatives. These fixed costs are irrelevant to the
make-or-buy decision. The key comparison is between purchase costs and the costs that will be
saved if the company purchases the component parts from outside plus the additional benefits of
using the resources freed up in the next best alternative use (opportunity cost). Furthermore,
managers should consider nonfinancial factors such as quality and timely delivery when making
outsourcing decisions.
11-8 Opportunity cost is the contribution to income that is forgone (rejected) by not using a
limited resource in its next-best alternative use.
11-9 No. When deciding on the quantity of inventory to buy, managers must consider both the
purchase cost per unit and the opportunity cost of funds invested in the inventory. For example,
the purchase cost per unit may be low when the quantity of inventory purchased is large, but the
11-1

benefit of the lower cost may be more than offset by the high opportunity cost of the funds
invested in acquiring and holding inventory.