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RelevantCostsRecap - As you can see management accounting...

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Smeal College of Business Accounting for Decision Making: ACCTG 211 Pennsylvania State University Professor Huddart Relevant Costs Recap Definitions – opportunity cost – sunk cost Schema 1 – Decide on the “currency,” e.g., cash flows to the business unit or items that affect operating income this year or next. – Settle on a convention for representing inflows/(outflows). – Include only items that are relevant for the “currency.” – Either compare one time versus recurring costs or do a full net present value analysis. – Include only items that differ across alternatives, i.e., the differential costs. – Consider qualitative factors. Schema 2 + Incremental Revenue - Incremental Cost - Opportunity Cost = Net Benefit/(Cost) Contribution margin per unit of the constraining factor.
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Unformatted text preview: As you can see, management accounting begins to overlap with operations research and linear programming, which are covered in other core courses. • Incentive issues. How do you get your employees to consider the relevant costs? The right thing to do is not necessarily what managers will do. • Pitfalls. Common mistakes include: – presuming all variable costs are relevant, – presuming all fixed costs are irrelevant, – unitizing fixed costs over the wrong volume, and – considering an inappropriate time horizon. c ± Steven Huddart, 2001–2008. www.personal.psu.edu/sjh11 ACCTG 211 Relevant Costs Recap • Common situations where relevant cost analysis is useful: – make or buy, – special order, and – product emphasis. Page 2...
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