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Unformatted text preview: The Navigator Scan Study Objectives Read Preview Read Chapter Review Work Demonstration Problem Answer True-False Statements Answer Multiple-Choice Questions Match Terms and Definitions Solve Exercises Chapter 23 I NCREMENTAL ANALYSIS AND CAPITAL BUDGETING CHAPTER STUDY OBJECTIVES After studying this chapter, you should be able to: 1. Identify the steps in management's decision-making process. 2. Describe the concept of incremental analysis. 3. Identify the relevant costs in accepting an order at a special price. 4. Identify the relevant costs in a make-or-buy decision. 5. Give the decision rule in deciding whether to sell or process materials further. 6. Identify the factors to consider in retaining or replacing equipment. 7. Explain the relevant factors in whether to eliminate an unprofitable segment. 8. Determine which products to make and sell when resources are limited. 9. Contrast annual rate of return and cash payback in capital budgeting. 10. Distinguish between the net present value and internal rate of return methods. The Navigator PREVIEW OF CHAPTER 23 An important purpose of management accounting is to provide management with relevant information for decision making. This chapter begins with an explanation of management's decision-making process. It then considers the topics of incremental analysis and capital budgeting. The organization and content of this chapter are as follows: The Statement of Cash Flows Incremental Analysis Capital Budgeting f Managements decision-making process f Evaluation process f Types of incremental analysis f Annual rate of return f Cash payback f Discounted cash flows The Navigator 23-2 Kimmel Accounting: Tools for Business Decision Making _____________________________________________________________________________ CHAPTER REVIEW Incremental Analysis 1. (S.O. 1) Management's decision-making process frequently involves the following steps: a. Identify the problem and assign responsibility. b. Determine and evaluate possible courses of action. c. Make a decision. d. Review results of decision. 2. (S.O. 2) Business decisions involve a choice among alternative courses of action. In making such decisions, management ordinarily considers both financial and nonfinancial information. The process used to identify the financial data that change under alternative courses of action is called incremental analysis. a. Incremental analysis includes the probable effects of the decision on future earnings. b. Data for incremental analysis involves estimates and uncertainty. c. Gathering data may involve market analysts, engineers, and accountants. 3. In incremental analysis, both costs and revenues may change. However, in some cases (1) variable costs may not change under the alternative courses of action, and (2) fixed costs may change....
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- Fall '07