Cost Accounting
Cost Accounting: A Managerial Emphasis,
EXHIBIT 11-1
Accounting Information and the Decision Process
FIVE-STEP SEQUENCE
Step 1:
Gathering
Information
AN ILLUSTRATION
The current manufacturing line uses 20 employees, 15 operating machines, and 5 handling materials, for a total cost of $640,000.
The rearrangement of the manufacturing assembly line is expected to eliminate materials-handling costs, equivalent to $160,000. The cost of the rearrangement will be $90,000.
Historical
Other
Costs Information
Feedback
Step 2:
Making
Predictions
Use the information from step 1 together with an assessment of probability as a basis for predicting the future labour costs of
$640,000 and $480,000 respectively for the “do not arrange” and “rearrange” alternatives. The rearrangement is predicted to cost $90,000.
Specific
Predictions
Step 3:
Choosing an
Alternative
Step 4:
Implementing
the Decision
Step 5:
Evaluating
Performance
The predicted benefits of the different alternatives in step 2 are compared and are related to the size of the required investment along with other considerations (such as likely effects on employee morale). Management chooses the “rearrange” alternative.
The manager implements the decision reached in step 3 by rearranging the manufacturing assembly line.
Evaluation of performance of the decision implemented in step 4 provides the feedback as the five-step sequence is then repeated in whole or in part. New manufacturing labour costs are $550,000 rather than the predicted $480,000. This historical information can help managers in making subsequent predictions, or improving implementation through, for example, employee training.
The Meaning Of Relevance
Relevant Costs and Relevant Revenues
O B J E C T I V E
2
Distinguish relevant costs and revenues from irrelevant costs and revenues in any decision situation
Relevant costs. Expected future costs that differ across
EXHIBIT 11-1
Accounting Information and the Decision Process
FIVE-STEP SEQUENCE
Step 1:
Gathering
Information
AN ILLUSTRATION
The current manufacturing line uses 20 employees, 15 operating machines, and 5 handling materials, for a total cost of $640,000.
The rearrangement of the manufacturing assembly line is expected to eliminate materials-handling costs, equivalent to $160,000. The cost of the rearrangement will be $90,000.
Historical
Other
Costs Information
Feedback
Step 2:
Making
Predictions
Use the information from step 1 together with an assessment of probability as a basis for predicting the future labour costs of
$640,000 and $480,000 respectively for the “do not arrange” and “rearrange” alternatives. The rearrangement is predicted to cost $90,000.
Specific
Predictions
Step 3:
Choosing an
Alternative
Step 4:
Implementing
the Decision
Step 5:
Evaluating
Performance
The predicted benefits of the different alternatives in step 2 are compared and are related to the size of the required investment along with other considerations (such as likely effects on employee morale). Management chooses the “rearrange” alternative.
The manager implements the decision reached in step 3 by rearranging the manufacturing assembly line.
Evaluation of performance of the decision implemented in step 4 provides the feedback as the five-step sequence is then repeated in whole or in part. New manufacturing labour costs are $550,000 rather than the predicted $480,000. This historical information can help managers in making subsequent predictions, or improving implementation through, for example, employee training.
The Meaning Of Relevance
Relevant Costs and Relevant Revenues
O B J E C T I V E
2
Distinguish relevant costs and revenues from irrelevant costs and revenues in any decision situation
Relevant costs. Expected future costs that differ across