Chap13gnposting - Chapter 13 Relevant Costs for Decision...

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Chapter 13: Relevant Costs for Decision Making 55 Chapter 13: Relevant Costs for Decision Making Choosing between two or more alternative courses of action: Revenues and costs Both fixed and variable costs Only relevant data are those factors that change, and only to the extent that they change Simple illustration Management is faced with choosing between Alternatives A and B. The accountant provides the following data to management: Alternative Alternative A B Revenues $100,000 $100,000 Variable Costs 70,000 50,000 Fixed Costs 10,000 40,000 Incremental Which course of action should be taken? Choose A! Approach Total Approach Net Income Alternative Alternative Increase (Decrease) A B Alternative A vs. B Revenues $ 100,000 $ 100,000 $ 0 Variable costs (70,000) (50,000) (20,000) Fixed costs (10,000) (40,000) 30,000 Net income $ 20,000 $ 10,000 $ 10,000 B vs. A $ 0 20,000 (30,000 ) $ (10,000 ) Can be both not just variable. This is an important point to make as we have been focusing all term on the fact that fixed costs are incurred no matter what. Relevant data only not all data. What does it mean for data to be relevant good place for E13-10 (or at the end of this page. Assume the two alternatives relate to production: What type of operation might Alternative A be? Higher variable costs could be more labor intensive with higher DL costs. What type of operation might Alternative B be? Higher fixed costs could be more capital intensive with higher MOH costs.
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Chapter 13: Relevant Costs for Decision Making 56 Examples where incremental analysis can provide answers: Make or buy decisions
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Chap13gnposting - Chapter 13 Relevant Costs for Decision...

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