Chapter 13 - Chapter 13: Short Run Decision Making Relevant...

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Chapter 13: Short Run Decision Making – Relevant Costing I. Short Run Decision Making – usually small scale actions that serve as a larger purpose a. Decision Making Model: specific set of procedures and produces a decision a.i. Recognize and define problem a.ii. Identify alternatives as possible solution to the problem, eliminate not feasible alternatives a.iii. Identify costs and benefits associated with feasible alternatives a.iv. Estimate the relevant costs and benefits of each alternative a.iv.1. Differential cost: difference between the summed costs of two alternatives in a decision a.iv.1.a. Compares the sum of each alternatives relevant costs only a.iv.1.b. Irrelevant costs is acceptable only if all irrelevant costs are included for each alternative a.v. Assess qualitative factors Make decision by selecting the alternative with the greatest net benefit b. Relevant Costs Defined b.i. 2 Characteristics: b.i.1. They are future costs b.i.2. They differ across alternatives b.ii. Opportunity Cost: benefit sacrificed or forgone b.ii.1. Not an accounting cost but important in decision making b.iii. Irrelevant costs – b.iii.1. Sunk Cost: a cost that cannot be affected by any future action. Ex: depreciation – none of the original cost is avoidable b.iii.1.a. Fail to possess the two characteristics required of relevant costs, irrelevant b.iii.1.b. Managers should ignore sunk costs for relevant decisions c. Cost Behavior and Relevant Costs c.i. Changes in supply and demand for resources must be considered when assessing relevance c.i.1. If changes in demand and supply for resources across alternatives bring about changes in spending, then the changes in resource spending are relevant to the costs that should be used in assessing the relative desirability of the
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This document was uploaded on 10/27/2011 for the course ACC 222 at Miami University.

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Chapter 13 - Chapter 13: Short Run Decision Making Relevant...

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