Chapter 4 Notes

Chapter 4 Notes - Chapter 4 Relevant Information for...

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Unformatted text preview: Chapter 4 Relevant Information for Special Decisions Relevant Information Two primary characteristics distinguish Two primary characteristics distinguish relevant from useless information: relevant from useless information: 1. 1. Relevant information Relevant information differs differs among the among the alternatives under consideration. alternatives under consideration. 2. 2. Relevant information is future oriented. Relevant information is future oriented. Sunk Cost A sunk cost has been incurred in a past transaction and cannot be changed, they are not relevant for making current decisions. Wish I hadn’t bought that Wish I hadn’t bought that stock. Cost me $25,000, and stock. Cost me $25,000, and now its worth only $15,000. I now its worth only $15,000. I really need a car but don’t really need a car but don’t have the cash! have the cash! Just sell the stock and Just sell the stock and buy the car! buy the car! Sunk Cost A sunk cost has been incurred in a past transaction and cannot be changed, they are not relevant for making current decisions. I don’t want to take the I don’t want to take the loss! loss! You’ve already taken the You’ve already taken the loss. The $25,000 is a loss. The $25,000 is a sunk cost. Like I said, sell sunk cost. Like I said, sell the stock and buy the car the stock and buy the car you need. you need. Relevant Information • $25,000 stock cost is irrelevant • Why? – Because it is a sunk cost – The $25,000 is not future oriented • Question to ask is: “if you had $15,000 today would you buy stock or a car” • Answer: a car • Need to sell the stock and buy the car Relevant (Differential) Revenues Relevant revenues must (1) be future oriented and (2) differ for the alternatives under consideration. Since relevant revenues differ between the alternatives, they are sometimes called differential revenues. Cost Classification Hierarchy • Unit-level Costs – Incurred each time a company generates one unit of product – Example: Direct materials & direct labor costs • Batch-level Costs – Costs incurred for a batch of products – Example: Setup and inspection costs • Product-level Costs – Costs incurred to create, sustain, or sell a product or product line – Example: Engineering costs for new automobile model • Facility-level Costs – Incurred to support the entire company – Example: Factory depreciation; maintenance; utilities Relevant (Avoidable) Costs Unit-level Unit-level Activities Activities Batch-level Batch-level Activities Activities Product-level Product-level Activities Activities Facility-level Facility-level Activities Activities Avoided by eliminating one Avoided by eliminating one unit of product.unit of product....
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This note was uploaded on 04/22/2008 for the course ACCT 2302 taught by Professor All during the Spring '08 term at Texas Tech.

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Chapter 4 Notes - Chapter 4 Relevant Information for...

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