Chapter 10 – 3
Relevant costs are costs that are avoidable by choosing another alternative. If a variable cost differs between alternatives in a decision, than it is relevant; however, it is not necessarily true that ALL variable costs are relevant.
Chapter 10 – 7
Prentiss would need to isolate the unavoidable costs of the product line first. A decision of whether a product line or other segment should be dropped should focus on the differences in the costs and benefits between dropping or retaining the product line. Caution should be exercised when using reports in which common fixed costs have been allocated among segments. If these common fixed costs are unaffected by the decision of whether to add or drop the line, they are irrelevant and should be removed before determining the real profitability of a product line. Sunk costs and future costs are typically irrelevant costs.
Chapter 10 – 12
Managers should focus their attention on effectively managing the constraint. This involves making the most profitable use of the constrained resource that is available. The value of relaxing the constraint is determined by the contribution margin per unit of the constrained resource for the work that would be done if more of the resource were available.
3 helpful steps:
1. Calculate the sales value if processed further minus the sales value at the slit-off point. 2. Determine the cost of further processing beyond the split-off point. 3. Take the amount in Step 1 and subtract from the amount in Step 9. If the result is positive, then choose to process further. If negative, then choose to sell at the split-off point.
Chapter 11 – 4
Accounting net income is based on accruals that ignor when cash flows occur. However, in capital budgeting, the timing of cash flows is critical. The present value of a cash flow depends on when it occurs. For that reason, cash flow rather than accounting net income...