ACC 406 Chapter Notes - Chapter 13: Sunk Costs, Target Costing, Opportunity Cost
28 Jun 2018
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ACC - Chapter 13 – Short run decisions making: Relevant costing
Short run decision making consists of choosing among alternatives with an immediate or
limited end in view. Often have long run consequences
A decision model, a specific set of procedures that produces a decision, can be used to
structure the decision maker’s thinking and to organize the information to make a good
decision
Outline of decision making model
1. Define the problem
2. Identify the alternatives
3. Identify the costs and benefits associated with each feasible alternative
Eliminate unnecessary costs
4. Estimate the relevant costs and benefits for each feasible alternative
Differential cost – the difference between the summed costs of two alternatives
in each decision
5. Assess the qualitative factors
6. Make the decision
Relevant costs – possess two characteristics 1. They are future costs and 2. They differ across
alternatives
Opportunity cost – the benefit sacrificed or forgone when one alternative is chosen over
another
Sunk cost – a cost that cannot be affected by any future action (always irrelevant)
Make or buy decisions are those decisions involving a choice between internal and external
production
Special order decisions – focus on whether a specially priced order should be accepted or
rejected
Keep or drop decisions – segmented reports prepared on a variable costing basis provide
valuable information for keep or drop decisions
Joint products have common processes and costs of production up to a split off point, they
then become distinguishable as separately identifiable products
The point of separation is called the split off point
A sell-or-process further decision is an important relevant decision that a manager must make
The mark up is a percentage applied to the base cost; It includes desired profit and any costs
not included in the base cost
Target costing is a method of determining the cost of a product or service based on the price
that customers are willing to pay
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Document Summary
Acc - chapter 13 short run decisions making: relevant costing. Short run decision making consists of choosing among alternatives with an immediate or limited end in view. A decision model, a specific set of procedures that produces a decision, can be used to structure the decision maker"s thinking and to organize the information to make a good decision. Outline of decision making model: define the problem. Identify the costs and benefits associated with each feasible alternative. Eliminate unnecessary costs: estimate the relevant costs and benefits for each feasible alternative. Differential cost the difference between the summed costs of two alternatives in each decision: assess the qualitative factors, make the decision. Opportunity cost the benefit sacrificed or forgone when one alternative is chosen over another. Sunk cost a cost that cannot be affected by any future action (always irrelevant) Make or buy decisions are those decisions involving a choice between internal and external production.
