Acct Ch 21 - CHAPTER 21 DISCUSSION QUESTIONS 1. Financial...

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CHAPTER 21 DISCUSSION QUESTIONS 1. Financial information that is used to prepare annual financial statements is historical in nature and is compiled under a total-cost philosophy. Information for decision making is sometimes estimated, current, and future- oriented, and it is often compiled on a differential, rather than a total-cost, basis. In addition, financial statements are general purpose in nature, while decisions about the future require special-purpose information. Often, the accounting system is designed to generate financial data in order to prepare the financial statements and does not readily generate data for decision making by man- agement. 2. A differential cost is a cost that is not the same for each of two or more alternatives being considered. If a manager is deciding whether or not to drop a product line, only the revenue that will be lost and the costs that will not be incurred are differential and, therefore, pertinent to the decision. 3. A variable cost is a cost that changes in total in direct proportion to changes in activ- ity level. A differential cost is a cost that changes as the result of a particular de- cision. An increase in variable costs that results from increasing production is called a differential cost, which often relates to de- cisions about alternatives that do not affect volume. Therefore, the additional cost of adding a department or a new product may involve both the fixed and the variable costs. Hence, all variable cost increases are differ- ential, but not all differential costs are vari- able. It is important to make this distinction in order to select the costs that are relevant to a particular product or process decision. 4. Yes. All costs, including fixed costs, are rel- evant for some decisions, e.g., establishing a normal price for a firm’s products. Furthermore, if you incur a fixed cost as a result of a decision, it is differential and rel- evant to the decision. Hence, a cost that becomes fixed after a decision is made may have affected the decision, even though it was not fixed when the decision was being considered. 5. A sunk cost is a cost that will not change as the result of a decision. A sunk cost is a cost incurred in the past. The cost of a ma- chine that was acquired five years ago is a sunk cost. If the machine is still useful in fu- ture years, there is benefit to the organiza- tion, but the benefit is not measured by the cost incurred in the past. Past costs will not change as the result of a decision to use or dispose of the machine; therefore, they are irrelevant to making this product or process decision. 6. All the costs are differential except the book value of the old equipment, which is a sunk cost. Note, however, that if the book value is deductible for income tax purposes, the sunk cost is reduced by the amount of the tax savings. 7.
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Acct Ch 21 - CHAPTER 21 DISCUSSION QUESTIONS 1. Financial...

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