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Lecture Introduction to managerial accounting: Chapter 11 - Folk, Garrison, Noreen

Chapter 11 - Relevant costs for decision making. After studying Chapter 11, you should be able to: Distinguish between relevant and irrelevant costs in decisions, prepare an analysis showing whether to keep or replace old equipment, prepare an analysis showing whether a product line or other organizational segment should be dropped or retained,. | Relevant Costs for Decision Making Chapter11 Cost Concepts for Decision Making A relevant cost is a cost that differs between alternatives. 1 2 Identifying Relevant Costs Costs that can be eliminated (in whole or in part) by choosing one alternative over another are avoidable costs. Avoidable costs are relevant costs. Unavoidable costs are never relevant and include: Sunk costs. Future costs that do not differ between the alternatives. Identifying Relevant Costs Sunk cost -- a cost that has already been incurred and that cannot be avoided regardless of what a manager decides to do. Identifying Relevant Costs Well, I’ve assembled all the costs associated with the alternatives we are considering. Identifying Relevant Costs Great! The first thing we need to do is eliminate all the sunk costs. Quick Check In a decision of whether to buy a new car and trade-in your old car or just keep your old car, which of the following are sunk costs? a. The cost of licensing the new car. b. The cost of licensing your old car next year if you keep it. c. The amount you paid for your old car. d. The amount you paid to repair your old car last month in case you wanted to sell it. Quick Check In a decision of whether to buy a new car and trade-in your old car or just keep your old car, which of the following are sunk costs? a. The cost of licensing the new car. b. The cost of licensing your old car next year if you keep it. c. The amount you paid for your old car. d. The amount you paid to repair your old car last month in case you wanted to sell it. Both of these costs have already been incurred and no decision now or in the future can change that fact. Identifying Relevant Costs Now that we have eliminated the sunk costs, we need to eliminate the future costs that don’t differ between alternatives. Quick Check In a decision of whether to buy a new car and trade-in your old car or just keep your old car, which of the following are future costs that don’t differ between the . | Relevant Costs for Decision Making Chapter11 Cost Concepts for Decision Making A relevant cost is a cost that differs between alternatives. 1 2 Identifying Relevant Costs Costs that can be eliminated (in whole or in part) by choosing one alternative over another are avoidable costs. Avoidable costs are relevant costs. Unavoidable costs are never relevant and include: Sunk costs. Future costs that do not differ between the alternatives. Identifying Relevant Costs Sunk cost -- a cost that has already been incurred and that cannot be avoided regardless of what a manager decides to do. Identifying Relevant Costs Well, I’ve assembled all the costs associated with the alternatives we are considering. Identifying Relevant Costs Great! The first thing we need to do is eliminate all the sunk costs. Quick Check In a decision of whether to buy a new car and trade-in your old car or just keep your old car, which of the following are sunk costs? a. The cost of licensing the new car. b. The cost