Log in
HomeClass Notes1,200,000CA670,000

ACTG 1P11 Lecture Notes - Sunk Costs, Opportunity Cost, Decision-Making

54 views2 pages
lemonbeetle162
1 Feb 2016
School
Brock University
Department
Accounting
Course
ACTG 1P11
Professor
Glenn Skrubbeltrang

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Consider financial (i. e. revenue) and non-financial (i. e. Consider financial (i. e. revenue) and non-financial (i. e. environment) information. Decisions involve a choice among alternative courses of action. Incremental analysis process of identifying the financial data that change under alternative courses of action always involved estimates and uncertainty. Data for incremental analyses may be gathered from market analysts, engineers, and accountants. Relevant cost (1) those costs and revenues that are different for each alternative, and (2) those costs and revenues that will occur in the future. Opportunity cost in choosing to take one action, the company must often give up. Sunk cost costs that have already been incurred and will not be changed or avoided the opportunity to benefit from some other action by any future decision. Decisions involving incremental analysis: accept an order at a special price. Analyze costs, revenue and net income of rejecting or accepting order: make or buy component parts or finished products.

Get access

Grade+
$40 USD/m
Billed monthly
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
10 Verified Answers
Class+
$30 USD/m
Billed monthly
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
7 Verified Answers

Related Documents

ACTG 1P11 Lecture Notes - Canadian Securities Administrators, Management Accounting, Customer Relationship Management
skygoldfish259
ACTG 1P11 Lecture Notes - Lecture 3: Accrual, Cash Flow, Net Income
pucelizard99
COMD 2050 Chapter : Ch 19 20 Social Variation Language And Culture
azuremammoth471

Related Questions

ETHICAL DILEMMA

The management of the Auto Parts Division of the SantanaCorporation receives a bonus if the division's income achieves aspecific target. For 2013 the target will be achieved by a widemargin. Mary Beth Williams, the controller of the division, hasbeen asked by Philip Stanton, the head of the division's managementteam, to try to reduce this year's income and "bank" some of theprofits for future years. Mary Beth suggests that the division'sbad debt expense as a percentage of net credit sales for 2013 beincreased from 3% to 5%. She believes that 3% is the more accurateestimate but knows that both the corporation's internal auditors aswell as the external auditors allow some flexibility when estimatesare involved.

Presented below is a sequence of steps that provide a frameworkfor analyzing ethical issues. These steps can help you apply yourown sense of right and wrong to ethical dilemmas.

Step 1: Determine the facts of the situation. This involvesdetermining the who, what, where, when, and how.

Step 2: Identify the ethical issue and the stakeholders.Stakeholders may include shareholders, creditors, management,employees, and the community.

Step 3: Identify the values related to the situation. Forexample, in some situations confidentiality may be an importantvalue that may conflict with the right to know.

Step 4: Specify the alternative courses of action.

Step 5: Evaluate the courses of action specified in step 4 interms of their consistency with the values identified in step 3.This step may or may not lead to a suggested course of action.

Step 6: Identify the consequences of each possible course ofaction. If step 5 does not provide a course of action, assess theconsequences of each possible course of action for all of thestakeholders involved.

Step 7: Make your decision and take any indicated action.

1. Company has a capacity to produce 100,000units in a year. Usually the companyproduces and sells 80,000 units in any year. The selling price is $20.00; variableproduction cost is $8.00 per unit and total fixed cost is$400,000. This year company received arequest of special order for 15,000 units at a selling price of$15.00 per unit.

1.For eachitem below decide it is relevant or not relevant.

a. Selling price of $20.00

b. Special order price of $15.00

c. Variable production cost of $8.00

d. Fixed cost of $400,000

1.Should the company accept this specialorder? Why or why not? show calculations to support youranswer.


2.2. In makingbusiness decisions, management ordinarily considers only financialinformation. TRUE OR FALSE?

3.

3. Theprocess used to identify which financial data changes underalternative courses of action is called incremental analysis. TRUEOR FALSE?

4.

4. 4.Opportunity cost is a cost that cannot be changed by anypresent or future decision. TRUE OR FALSE?

5.

5. Asell-or-process further decision compares the total revenue to beearned and all costs of producing the product. TRUE ORFALSE?

6.

6. Sunkcosts are not relevant in incremental analysis. TRUE ORFALSE?

7.7. What is netpresent value?

a. Thedifference between the present value of net income and the capitalinvestment

b. Thedifference between the net cash flows and the capitalinvestment

c. Thedifference between the present value of net cash flows and thecapital investment

d. The difference between the net cash flows and thepresent value of the capital investment

8.8. To produce oneturkey platter, Jax Inc. uses $10 of variable and $1.50 of fixedcosts. A Peruvian wholesaler has offered to purchase 2,000 plattersat $12 each. Jax will incur special shipping costs of $0.75 perplatter if the order is accepted. Jax has sufficient unusedcapacity to produce the additional platters. What will be theeffect on net income if the special order is accepted?

a. $1000 increase

b. $2500 increase

c. $4000 increase

d. $500 decrease

Tactical decision making

Tactical decision making means choosing among alternatives withan immediate or limited end in view. For example, a company mayaccept a special order for less than the normal selling price touse idle capacity. Tactical decisions tend to be short-runin nature; however, it should be emphasized that short-rundecisions often have long-run consequences. A general tacticaldecision-making model is outlined here.

1. Recognize and define theproblem.
2. Identify possible alternativesolutions to the problem, and eliminate any unfeasiblealternatives.
3. Identify the costs and benefitsassociated with each feasible alternative. Eliminate the costs andbenefits that are not relevant to the decision.
4. Compare the relevant costsand benefits for each alternative.
5. Assess qualitative factors.
6. Select the alternative with thegreatest overall benefit.

Identifying and comparing relevant costs and revenues is theheart of the tactical decision model. Relevant costs (revenues) arefuture costs (revenues) that differ across alternatives. (Revenuesare treated in the same way as costs, so we will simplify thediscussion by referring to costs.) All decisions relate to thefuture; so, only future costs can be relevant. In addition, thecost must differ from one alternative to another. If a future costis the same for more than one alternative, it has no effect on thedecision. Such a cost is an irrelevant cost.

Assume that Reeves Company is considering accepting a specialorder for $25 per unit when the normal selling price is $30 perunit. Reeves has enough excess capacity to make the order withoutdisplacing normal sales. The alternatives facing Reeves Company are(Select "Yes" for the statements that are applicable and "No" forthe items that do not apply):

Accept the special order. - Select your answer -YesNoItem1
Reject the special order. - Select your answer -YesNoItem2
Sell normal sales for $25 perunit. - Select your answer -YesNoItem3

Choose which of the following are relevant in deciding whetheror not to accept the special order. (Select "Yes" for thestatements that are applicable and "No" for the items that do notapply)

$25 price. - Select your answer -YesNoItem4
$30 normal price. - Select your answer -YesNoItem5
Variable cost of making the unitsin the special order. - Select your answer -YesNoItem6
Depreciation on factory equipmentused in making the special order units. - Select your answer -YesNoItem7
Increased property taxes on thefactory building which are due while the special order would bemade. - Select your answer -YesNoItem8

While cost and revenue information is important, otherinformation may be needed to make an informed decision. Thesenon-financial factors are termed qualitative and are often relevantin decision making. For example, in deciding whether to make acomponent in-house or purchase it from an outside supplier, thecompany may consider any difference in quality or in responsivenessto the company's production schedules.