# Cost volume profit analysis chapter 5 2budgeting

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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...
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