This chapter introduces students to activity-based costing (ABC), which is a tool that has been embraced by a wide variety of service, manufacturing, and non-profit organizations. After studying chapter 7, you should be able to: Understand activity-based costing and how it differs from a traditional costing system, assign costs to cost pools using a first-stage allocation, compute activity rates for cost pools. | Differential Analysis: The Key to Decision Making Chapter 7 Chapter 7: Differential Analysis: The Key to Decision Making Making decisions is one of the basic functions of a manager. To be successful in decision making, managers must be able to tell the difference between relevant and irrelevant data and must be able to correctly use the relevant data in analyzing alternatives. The purpose of this chapter is to develop these skills by illustrating their use in a wide range of decision-making situations. Relevant Costs and Benefits A relevant cost is a cost that differs between alternatives. 1 2 A relevant benefit is a benefit that differs between alternatives. Costs that differ between alternatives are called relevant costs. Benefits that differ between alternatives are relevant benefits. Identifying Relevant Costs An avoidable cost is a cost that can be eliminated, in whole or in part, by choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs . | Differential Analysis: The Key to Decision Making Chapter 7 Chapter 7: Differential Analysis: The Key to Decision Making Making decisions is one of the basic functions of a manager. To be successful in decision making, managers must be able to tell the difference between relevant and irrelevant data and must be able to correctly use the relevant data in analyzing alternatives. The purpose of this chapter is to develop these skills by illustrating their use in a wide range of decision-making situations. Relevant Costs and Benefits A relevant cost is a cost that differs between alternatives. 1 2 A relevant benefit is a benefit that differs between alternatives. Costs that differ between alternatives are called relevant costs. Benefits that differ between alternatives are relevant benefits. Identifying Relevant Costs An avoidable cost is a cost that can be eliminated, in whole or in part, by choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs. Two broad categories of costs are never relevant in any decision. They include: Sunk costs. A future cost that does not differ between the alternatives. An avoidable cost is a cost that can be eliminated, in whole or in part, by choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs. Two broad categories of costs are never relevant in any decision: A sunk cost is a cost that has already been incurred and cannot be avoided regardless of what a manager decides to do. A future cost that does not differ between alternatives is never relevant in a decision. Decision Making: A Two-Step Process Eliminate costs and benefits that do not differ between alternatives. Use the remaining costs and benefits that differ between alternatives in making the decision. The costs that remain are the differential, or avoidable, costs. Step 1 Step 2 Decision making is a two-step process. The first step is to eliminate costs and .
