Chapter 16 - Costs for decision making. After reading this chapter, you should be able to answer the following questions: What are the meaning and application of the following “cost” terms: differential, allocated, sunk, and opportunity? How are costs determined to be relevant for short-run decisions? What is the special pricing decision when a firm is at full vs. idle capacity?. | © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Accounting: What The Numbers Mean Tenth Edition Marshall, McManus, and Viele Chapter 16 Costs for Decision Making PowerPoint Authors: Susan Coomer Galbreath, ., CPA Charles W. Caldwell, ., CMA Jon A. Booker, ., CPA, CIA Cynthia J. Rooney, ., CPA Chapter 16: Costs for Decision Making Relevant Cost Information LO 1 16- Relevant costs are differential costs that will differ according to alternate activities being considered. Opportunity costs represent income foregone by choosing one alternative over another. Irrelevant costs are allocated costs, common costs that have been arbitrarily assigned to a product or activity. Sunk costs are costs that have already been incurred and will not change. The decision to accept additional business should be based on incremental costs and incremental revenues. Incremental amounts are those amounts that occur if the company decides to accept the new business. The Special Pricing Decision LO 3 16- Learning Objective 3: Analyze relevant costs for the following decisions: sell or process further, special pricing, target costing, make or buy, continue or discontinue a segment, and product mix. The decision to accept additional business should be based on incremental costs and incremental revenues. Incremental amounts are those amounts that occur if the company decides to accept the new business. Should I continue to make the part, or should I buy it? The Make or Buy Decision LO 3 16- Should I continue to make the part, or should I buy it? What will I do with my idle facilities if I buy the part? The relevant cost of making a component is the cost that can be avoided by buying the component from an outside supplier. Decision rule: Costs avoided must be greater than outside supplier’s price to consider buying the component. The Make or Buy Decision LO 3 16- The relevant cost of making a component is the cost that can be avoided by buying the . | © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Accounting: What The Numbers Mean Tenth Edition Marshall, McManus, and Viele Chapter 16 Costs for Decision Making PowerPoint Authors: Susan Coomer Galbreath, ., CPA Charles W. Caldwell, ., CMA Jon A. Booker, ., CPA, CIA Cynthia J. Rooney, ., CPA Chapter 16: Costs for Decision Making Relevant Cost Information LO 1 16- Relevant costs are differential costs that will differ according to alternate activities being considered. Opportunity costs represent income foregone by choosing one alternative over another. Irrelevant costs are allocated costs, common costs that have been arbitrarily assigned to a product or activity. Sunk costs are costs that have already been incurred and will not change. The decision to accept additional business should be based on incremental costs and incremental revenues. Incremental amounts are those amounts that occur if the company decides to accept the new business. The Special
