Opportunity cost is often not an out of pocket cost

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Managerial Accounting
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Chapter 9 / Exercise EX9-3
Managerial Accounting
Warren/Tayler
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opportunity cost is often not an ‘out-of-pocket’ cost and is not measured within the business’ accounting system, people tend to think it is less important than these costs that are recorded. This behavioural tendency can result in faulty decision making. By definition, an opportunity cost is something that does not or will not happen. Hence it is often overlooked. To help students recognise opportunity costs that are not recorded in the accounting system in the immediate future (but sometimes become large lost benefits in the long term), it might be helpful to discuss the impact on their university results if a student spent the mid-semester break at the snowfields instead of catching up with academic work. These might include the cost and effort of repeating parts of the degree, worse exam results that later affect job hunting, later finishing of the degree and so on.
19.14 Briefly describe the appropriate approach for making a decision about adding or deleting a department. Is this a tactical or long-term decision? Explain your answer. LO 19.7
19.29 Joint products: Manufacturer. LO 19.8 Castille Industries produces chemicals for the swimming pool industry. In one joint process, 10,000 L of GSX are processed into 7000 L of xenolite and 3000 L of banolide. The cost of the join process, including the GSX, is $20,000. Castille allocates $14,000 of the join cost to the xenolite and $6,000 of the cost to the banolide. The 3,000L of banolide xan be sold at the split-off point for $2,500, or they can be processed further into a product called kitrocide. The sales value of 3,000L of kitrocide is $10,000, and the additional processing cost is $8,100. Castille’s managing director has asked your consulting firm to make a recommendation as to whether the banolide should be sold at the split-off point/processed further. Write a letter providing an analysis and a recommendation. Dear Managing Director We recommend against processing banolide into kitrocide. The incremental cost of further processing, $8100, exceeds the incremental revenue, $7500. This $7500 incremental revenue is the difference between the sales value of the kitrocide, $10 000, and the sales value of the banolide, $2500. We would also like to point out that the cost of the joint process, $20 000, and the allocation of that cost to the joint products is irrelevant to the decision.
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Managerial Accounting
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Chapter 9 / Exercise EX9-3
Managerial Accounting
Warren/Tayler
Expert Verified

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