Cost Accounting Solutions

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CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION SHORT‐ANSWER QUESTIONS 11‐1 The five steps in the decision process outlined in Exhibit 11‐1 of the text are
1. Identify the problem and uncertainties 2. Obtain information 3. Make predictions about the future 4. Make decisions by choosing among alternatives 5. Implement the decision, evaluate performance, and learn An example of interdependencies include absenteeism/low employee morale and increased labour costs.

11‐2 Relevant costs are expected future costs that differ among the alternative courses of action being considered. Historical costs are irrelevant because they are past costs and, therefore, cannot differ among alternative future courses of action.

11‐3 Quantitative factors are outcomes that are measured in numerical terms. Some quantitative factors are financial––that is, they can be easily expressed in monetary terms. Direct materials is an example of a quantitative financial factor. Qualitative factors are outcomes that are difficult to measure accurately in numerical terms. An example is employee morale.

11‐4 Two potential problems that should be avoided in relevant cost analysis are (i) (ii) Do not assume all variable costs are relevant and all fixed costs are irrelevant. Do not use unit‐cost data directly. It can mislead decision makers because a. it may include irrelevant costs, and b. comparisons of unit costs computed at different output levels lead to erroneous conclusions

11‐5 Opportunity cost is the contribution to income that is forgone (rejected) by not using a limited resource in its next‐best alternative use.

11‐6 No. Some variable costs may not differ among the alternatives under consideration and, hence, will be irrelevant. Some fixed costs may differ among the alternatives and, hence, will be

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