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ACCT 230- Ch. 10

Terms in this set (21)

Incremental (Differential) Analysis Approach
•The process in which managers identify data that change under alternative actions to allow managers to choose among alternatives (compare to total cost approach)
•Gives managers choices
•Identify which costs and revenues are relevant to the decision
How do you make a decision using incremental analysis?
1) Eliminate costs and benefits that don't differ (in total) between alternatives
2) Base the decision on the remaining costs and benefits
Incremental Revenues/Costs
Total difference in revenues/costs among 2 alternatives
Relevant Costs
future costs that differ among the alternatives (also applies to revenues)
Avoidable Costs
A cost that can be eliminated (in whole or in part) by choosing one alternative over another
**considered relevant costs
Sunk COsts
A cost that has already been incurred (can't be changed)
***NOT relevant
Opportunity Costs
Benefit foregone by choosing the best alternative (ex: income)
Special Orders
Occur when a customer orders a product that differs from standard output or offers a price lower than usual sales price
When should you accept a special order?
When the incremental revenues exceed the incremental costs
What will increase as a result of accepting a special order?
Revenues and Variable Costs; Fixed Costs may increase depending on if idle capacity exists
What happens if a segment is eliminated?
•Total Revenues will decrease by the amount of that division's revenues
•Total VC will decrease by that divisions VC
•Only Avoidable (Direct) FC can be eliminated
What should you consider when deciding to drop a segment?
•Beware of common fixed costs b/c they may or may not change
•Consider effect on related product lines
•Decision Rule: Retain the segment unless FC eliminated exceed the contribution margin lost
Segment Elimination Rule of Thumb
•If decrease in CM > decrease in FC, keep the segment
•If decrease in CM < decrease in FC, eliminate segment
Joint Products
A number of end products made from a single raw material
EX: Crude Oil (joint cost) creates gasoline, kerosine, etc.
Split-off Point
The point in the manufacturing process at which the joint products can be recognized as separate products
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