AFM481 Chapter Notes - Chapter 11: Marginal Cost, Sunk Costs, Decision Model

• School: University of Waterloo
• Department: Accounting & Financial Management
• Course: AFM481
• Professor: Grant Russell

Document Summary

Decision model: formal method of making a choice that involves both quantitative and qualitative analyses. Incremental cost: additional total cost incurred for an activity. Incremental revenue: additional total revenue from an activity: differential revenue: differential in total revenue between two alternatives. Incorrect general assumptions, e. g. all variable costs are relevant and all fixed costs are irrelevant. Same unit costs are used at different output levels: how to avoid these problems, base decisions on total revenues and total costs, relevance concept. Incremental costs: opportunity costs, profit forgone, not recorded in financial accounting systems since they were not actually selected. The carrying costs of inventory: relevant cost of any alternative under the opportunity cost approach. Incremental cost of the alternative: opportunity cost of the profit forgone from choosing that alternative, opportunity cost of holding inventory is the income forgone by tying money in inventory and not investing it elsewhere.