Chapter_4 - The Concept of Relevance What information is...

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The Concept of Relevance What information is relevant?
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The Concept of Relevance What information is relevant? That depends on the decision being made. Decision making essentially involves choosing among several courses of action.
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Relevant Information Relevant Information differs between the alternatives under consideration and is future oriented. Sunk Cost has already been incurred in a past transaction, and cannot be avoided. It is not a relevant cost.
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Relevant Revenues and Costs Relevant Revenues are expected future revenues that differ between the alternatives under consideration. Relevant Costs are avoidable costs that can be eliminated by taking a specified course of action.
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Relationship of Cost Avoidance to a Cost Hierarchy Unit-level Unit-level Activities Activities Avoided by eliminating one Avoided by eliminating one unit of product. unit of product. Batch-level Batch-level Activities Activities Avoided when a batch of Avoided when a batch of work is eliminated. work is eliminated. Product-level Product-level Activities Activities Avoided if a product line Avoided if a product line is eliminated. is eliminated. Facility-level Facility-level Activities Activities Some costs may be avoided Some costs may be avoided when a product line is when a product line is eliminated. eliminated.
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Differential Cost Analysis: A Valuable Managerial Tool Differential analysis is the process of . . . Estimating revenues and costs of alternative actions and Comparing these estimates to the status quo.
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Short-run estimates of costs and revenues cover periods of time in which capacity is unchanged . Short-run decisions affect cash flows, but the time value of money is ignored because of the short time period. Differential Cost Analysis: A Valuable Managerial Tool
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variable costs and fixed costs may be differential costs. Variable costs are differential costs when a decision involves changes in volume. Fixed costs are differential when a decision involves changes in buildings and equipment. Differential Cost Analysis:
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This note was uploaded on 04/22/2008 for the course ACC 301 taught by Professor Bruns during the Fall '08 term at Northeastern.

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Chapter_4 - The Concept of Relevance What information is...

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