Session 15 - Accounting 102 Session 15 Relevant Information...

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Business Law: Text and Cases
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Chapter 29 / Exercise 03
Business Law: Text and Cases
Clarkson/Miller
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Accounting 102Session 15
We have textbook solutions for you!
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Business Law: Text and Cases
The document you are viewing contains questions related to this textbook.
Chapter 29 / Exercise 03
Business Law: Text and Cases
Clarkson/Miller
Expert Verified
Relevant Informationfor Decision Making
In our discussion of CVP analyses, we examined how information about the behaviors of revenues and costs can be useful for decision making.Now, we are going to discuss some other uses of managerial accounting information for decision making.Using Managerial Information to Make Decisions1.Specify the goal – profit maximization, market share, product quality, etc. 2. Identify the alternative ways to achieve that goal3.Gather the data on all of the relevantcosts (and revenues) that will be affected by the decision4.Estimate the relevant costs (and revenues) for each of the alternativesAn important skill needed to make decisions efficiently is the ability to identify the information that is relevant to the decision under consideration – the ability to identify the costs and/or revenues that will be affected by the decision.
Identifying Relevant Costs (Revenues)For any decision, the relevant costs (revenues) are those that are expected to (will) differ among the alternative courses of action.To choose between the two alternatives below, which items are relevant?Alternative 1:FC = $10,000; VC = $10/unit; Investment = $100,000Alternative 2:FC = $10,000; VC = $ 8/unit; Investment = $150,000Opportunity CostsAn opportunity cost is the maximum amount that could have been received by selecting an alternative use for the resources. Generally, opportunity costs are relevant to a decision.For example, the opportunity cost of your decision to attend university is the income that you could have earned by working, instead.
Sunk CostsA sunk cost is a cost that has been incurred. Because sunk costs cannot be changed, they are irrelevant for any decision.For example, the book values (historical cost) of assets are irrelevant for all decisions.However, in many cases, the current market valueof an asset will be relevant for the decision.
1) One-Time Only Special OrdersTypically, decisions involving one-time special orders can be made using C-V-P analysis.While the general rule is that, for decisions of this kind, only variable costs need be considered – fixed costs are irrelevant. That is not always the case; in some cases, (some) variable costs may not berelevant; in others, fixed costs may be.

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