Acct: Ch. 21

Identify the steps in management's decision-making process:

Management's decision-making process consists of (a) identifying the problem and assigning responsibility for the decision, (b) determining and evaluating possible courses of action, (c) making the decision, and (d) reviewing the results of the decision.

Describe the concept of incremental analysis:

Incremental analysis identifies financial data that change under alternative courses of action. These data are relevant to the decision because they will vary in the future among the possible alternatives.

Identify the relevant costs in accepting an order at a special price:

The relevant costs are those that change if the order is accepted. The relevant information in accepting an order at a special price is the difference between the variable manufacturing costs to produce the special order and expected revenues. Any changes

Identify the relevant costs in a make-or-buy decision:

In a make-or-buy decision, the relevant costs are (a) the variable manufacturing costs that will be saved as well as changes to fixed manufacturing costs, (b) the purchase price, and (c) opportunity cost.

Identify the relevant costs in determining whether to sell or process materials further:

The decision rule for whether to sell or process materials further is: Process further as long as the incremental revenue from processing exceeds the incremental processing costs.

Identify the relevant costs to be considered in repairing, retaining, or replacing equipment:

The relevant costs to be considered in determining whether equipment should be repaired, retained, or replaced are the effects on variable costs and the cost of the new equipment. Also, any disposal value of the existing asset must be considered.

Identify the relevant costs in deciding whether to eliminate an unprofitable segment or product:

In deciding whether to eliminate an unprofitable segment or product, the relevant costs are the variable costs that drive the contribution margin, if any, produced by the segment or product. Disposition of the segment's or the product's fixed expenses and

Incremental analysis

The process of identifying the financial data that change under alternative courses of action.

Joint costs

For joint products, all costs incurred prior to the point at which the two products are separately identifiable (known as the split-off-point).

Joint products

Multiple end-products produced from a single raw material and a common production process.

Opportunity cost

The potential benefit that is lost when one course of action is chosen rather than an alternative course of action.

Relevant costs

Those costs and revenues that differ across alternatives.

Sunk cost

A cost that cannot be changed or avoided by any present or future decision.