CACC406 CH08

CACC406 CH08 - CACC406 CH08 Relevant...

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CACC406 CH08 Relevant Information/cost/revenues is the predicted future costs and revenues that will differ among the alternative courses of action prediction of the future, not a summary of the past o Irrelevant Costs are historical costs ; historical data are useful only in that they may help predict future events Accuracy and Relevance Ideally one would like relevant and accurate information However decision makers must weigh the extra cost of obtaining more accurate information, against the benefit which the increased accuracy offers precise but irrelevant information is worthless for decision making imprecise but relevant information can be useful o degree to which information is relevant and/or precise depends on the degree to which it is qualitative and/or quantitative Example of Relevance EXAMPLE 1 Suppose you buy gasoline from either of 2 nearby gasoline station Yesterday: one station was selling gasoline at $0.90/litre; the other at $0.85/litre Today: o Your automobile needs gasoline o You assume that these prices have not changed (**) Relevant costs are the expected future costs that will differ between the alternatives. It is not what you paid in the past, or what you observed yesterday, but what you expect to pay when you drive in to get gasoline. Relevant costs are $0.90 and $0.85 by (**) Cost meets 2 criteria: 1) It is the expected future cost 2) It differs between the alternatives EXAMPLE 2 You plan to have your car’s oil changed. The recent price at each station was $25, and this is what you expect to pay. But this expected future cost is irrelevant because it does not meet the 2 nd criterion – it will be the same under either alternative EXAMPLE 3 A manufacturer is thinking of using aluminum instead of copper in the product line. The cost of direct material will decrease from $1.00 to $0.80 Aluminum Copper Difference Direct Materials $0.80 $1.00 $0.20 The direct labour cost, will continue regardless of the material used, which means the there is no difference between the alternative, therefore it is irrelevant.
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CACC406 CH08 There is no harm in including irrelevant items in a formal analysis, but confining reports to the relevant items only provides greater clarity and time savings for managers Example: Accept or reject a special sales order Samson Company Absorption and Contribution forms of the Income Statement for the year ended Dec. 31, 2006
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This note was uploaded on 03/27/2012 for the course ACC 406 taught by Professor Unknown during the Spring '09 term at Ryerson.

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CACC406 CH08 - CACC406 CH08 Relevant...

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