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Lecture Managerial accounting (14/e) - Chapter 12: Differential analysis: The key to decision making

Making decisions is one of the basic functions of a manager. To be successful in decision making, managers must be able to tell the difference between relevant and irrelevant data and must be able to correctly use the relevant data in analyzing alternatives. The purpose of this chapter is to develop these skills by illustrating their use in a wide range of decision-making situations. | Differential Analysis: The Key to Decision Making Chapter 12 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 12: Differential Analysis: The Key to Decision Making Making decisions is one of the basic functions of a manager. To be successful in decision making, managers must be able to tell the difference between relevant and irrelevant data and must be able to correctly use the relevant data in analyzing alternatives. The purpose of this chapter is to develop these skills by illustrating their use in a wide range of decision-making situations. Relevant Costs and Benefits A relevant cost is a cost that differs between alternatives. 1 2 A relevant benefit is a benefit that differs between alternatives. Costs that differ between alternatives are called relevant costs. Benefits that differ between alternatives are relevant benefits. Identifying Relevant Costs An avoidable cost is a cost that can be eliminated, in whole or in part, by . | Differential Analysis: The Key to Decision Making Chapter 12 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 12: Differential Analysis: The Key to Decision Making Making decisions is one of the basic functions of a manager. To be successful in decision making, managers must be able to tell the difference between relevant and irrelevant data and must be able to correctly use the relevant data in analyzing alternatives. The purpose of this chapter is to develop these skills by illustrating their use in a wide range of decision-making situations. Relevant Costs and Benefits A relevant cost is a cost that differs between alternatives. 1 2 A relevant benefit is a benefit that differs between alternatives. Costs that differ between alternatives are called relevant costs. Benefits that differ between alternatives are relevant benefits. Identifying Relevant Costs An avoidable cost is a cost that can be eliminated, in whole or in part, by choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs. Two broad categories of costs are never relevant in any decision. They include: Sunk costs. A future cost that does not differ between the alternatives. An avoidable cost is a cost that can be eliminated, in whole or in part, by choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs. Two broad categories of costs are never relevant in any decision: A sunk cost is a cost that has already been incurred and cannot be avoided regardless of what a manager decides to do. A future cost that does not differ between alternatives is never relevant in a decision. Total and Differential Cost Approaches The management of a company is considering a new labor saving machine that rents for $3,000 per year. Data about the company’s annual sales and costs with and without the new machine are: Assume the following information for a .