Cost volume profit analysis chapter 5 2budgeting

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: will use this approach for: 1.Cost-volume-profit analysis (Chapter 5) 2.Budgeting (Chapter 8) 3.Segmented reporting (Chapter 6) 4.Special decisions such as pricing and make-orbuy analysis (Chapter 12) Learning Objective 6 Understand the differences between direct and indirect costs Assigning Costs to Cost Objects Direct costs • • Costs that can be easily traced to a unit of product or other cost object Example: jet fuel Indirect costs • • Costs that cannot be easily traced to a unit of product or other cost object Example: reservation system Learning Objective 7 Define and give examples of cost classifications used in making decisions: differential costs, opportunity costs and sunk costs Cost Classifications for Decision Making Every decision involves a choice between at least two alternatives Only those costs and benefits that differ between alternatives are relevant in a decision. All other costs and benefits should be ignored Differential Cost and Revenue Costs and revenues that differ among alternatives Differential revenue is: $2,000 – $1,500 = $500 Differential cost is: $300 - $0 = $300 Opportunity Cost The potential benefit given up when one alternative is selected over another Example: If you were not attending college, you could be earning $25,000 per year. Your opportunity cost of attending college for one year is $25,000. Sunk Costs Sunk costs have already been incurred and cannot be changed now or in the future. These costs should be ignored when making decisions Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost. d o En ha f C r 2 pte...
View Full Document

Ask a homework question - tutors are online