C1113s - ACCT220 RelevantCostsforDecisionMaking (Chapter13)...

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1 ACCT 220 Relevant Costs for Decision Making  (Chapter 13)
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2 Chapter 13: The Goals Discuss concepts of costs and revenue relevant to  decision making: a) Discuss the principles of decision-making including the  identification of relevant cash flows and their use alongside non- quantifiable factors. b) Discuss the possible conflicts between cost accounting for profit  reporting and inventory valuation and information required for  decision-making. c) Analyze the typical managerial decisions, including pricing and  product mix decisions.
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3 Relevant Costs for Decision Making The Plan: I. Identification of relevant costs. Some typical decisions: II. Equipment replacement decision. III. Drop or retain a segment. IV. Make-or-buy decision. V. Special order decision. VI. Joint product costs. VII. Utilization of constrained resources.
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4 I. Relevant Information It differs among (or between) competing alternatives Only those future revenues and costs that differ among alternatives are relevant It has a bearing on the future Past costs or revenues may be helpful as a basis for making predictions. Relevant costs (benefits) are also known as differential costs (benefits). Avoidable costs are those costs that can be eliminated in whole or in part by choosing one alternative over another Avoidable costs are relevant costs. Two categories of costs are NOT relevant in decisions: 1. Sunk costs 2. Future costs that do not differ between alternatives.
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5 I. Pitfalls to Avoid Including irrelevant costs (e.g., Sunk costs) Excluding relevant costs (e.g., Opportunity costs) Unitized fixed costs be careful of making fixed costs appear variable Allocated fixed costs Some fixed costs are avoidable. Avoid incorrect general assumptions about information, especially: “All variable costs are relevant and all fixed costs are irrelevant” There are notable exceptions for both costs Focus on total revenues and total costs, not their per-unit equivalents
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6 I. Relevant Costs Steps in making decisions: 1. Identify the alternative actions. 2. Eliminate the sunk costs. 3. Eliminate costs and benefits that do not differ, in total, between alternatives. 4. Make the decision based on the remaining costs and benefits.
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7 I. Qualitative factors and behavioral  considerations Quantitative factors are outcomes that can be measured in numerical terms Qualitative factors are outcomes that are difficult to measure accurately in numerical terms, such as satisfaction. They are just as important as quantitative factors even though they are difficult to measure.
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C1113s - ACCT220 RelevantCostsforDecisionMaking (Chapter13)...

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