Acc550-ch 11 - ACC550 CHAPTER 11 DECISION MAKING RELEVANT...

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ACC550 CHAPTER 11 Relevance and decision making 1) Decision making involves choosing between different alternatives a) We focus on the relevant costs and revenues associated with each alternative b) We ignore revenues and costs that remain constant regardless of the alternative chosen i) They are irrelevant costs to the decision making process 2) Relevant costs and revenues a) These are costs and revenues that differ between different alternatives b) They can be avoided by choosing a different alternative Discussion point: Relevant costs and revenues are also known as "avoidable", "incremental" and "differential" costs and revenues. 3) Irrelevant costs and revenues a) These are costs and revenues that do not change between different alternatives b) They should be ignored in the decision making process c) Sunk costs i) These are costs that have already been incurred and cannot be avoided regardless of alternative chosen ii) Example: Past repair expenses are irrelevant in deciding whether to repair or replace an asset d) Future costs and revenues that do not differ between alternatives i) Example: The plant manager's salary is irrelevant in deciding on floor plans of a new plant Expanded discussion Let's discuss an example decision. Let's assume a production run fails final inspection and we must now decide whether to (1) work through the failed material to fix it or (2) scrap the failed material and start again from scratch. Let's also assume that we are obligated to fill the related customer order. Which costs should we consider in making our decision?
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This note was uploaded on 02/21/2009 for the course ACC 100 taught by Professor Smith during the Spring '09 term at University of Phoenix.

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Acc550-ch 11 - ACC550 CHAPTER 11 DECISION MAKING RELEVANT...

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