When choosing between two alternatives costs that do not differ between the two alternatives can be considered to be relevant to that decision?

Outline the 5 step sequences in a decision process

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

Relevant costs are expected future costs that differ among the alternative courses of action being considered.

Why are historical cost irrelevant?

Historical costs are irrelevant because they are past costs and, therefore, cannot differ among alternative future courses of action.

are all future cost relevant?

No. Relevant costs are defined as those expected future costs that differ among alternative courses of action being considered. Thus, future costs that do not differ among the alternatives are irrelevant to deciding which alternative to choose

distinguish between quantitative and qualitative factors

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. Other quantitative nonfinancial factors, such as on-time flight arrivals, cannot be easily expressed in monetary terms. Qualitative factors are outcomes that are difficult to measure accurately in numerical terms. An example is employee morale.

are all variable cost relevant and all fixed cost irrelevant?

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 relevant.

what are two potential problems that should be avoided in relevant cost analysis

Two potential problems that should be avoided in relevant cost analysis are (i) Do not assume all variable costs are relevant and all fixed costs are irrelevant. (ii) 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

Why shouldn't a component part always be purchased whenever the purchase price is less than its total manufacturing cost per unit?

Some of the total manufacturing cost per unit of a product may be fixed, and, hence, will not differ between the make and buy alternatives. These fixed costs are irrelevant to the make-or-buy decision. The key comparison is between purchase costs and the costs that will be saved if the company purchases the component parts from outside plus the additional benefits of using the resources freed up in the next best alternative use (opportunity cost). Furthermore, managers should consider nonfinancial factors such as quality and timely delivery when making outsourcing decisions.

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

“Managers should always buy inventory in quantities that result in the lowest purchase cost per unit.” Do you agree? Why?

No. When deciding on the quantity of inventory to buy, managers must consider both the purchase cost per unit and the opportunity cost of funds invested in the inventory. For example, the purchase cost per unit may be low when the quantity of inventory purchased is large, but the benefit of the lower cost may be more than offset by the high opportunity cost of the funds invested in acquiring and holding inventory.

Management should always maximize sales of the product with the highest contribution margin per unit.” Do you agree? Why?

No. Managers should aim to get the highest contribution margin per unit of the constraining (that is, scarce, limiting, or critical) factor. The constraining factor is what restricts or limits the production or sale of a given product (for example, availability of machine-hours).

“A branch office or business segment that shows negative operating income should be shut down.” Do you agree? Explain briefly.

No. For example, if the revenues that will be lost exceed the costs that will be saved, the branch or business segment should not be shut down. Shutting down will only increase the loss. Allocated costs and fixed costs that will not be saved are irrelevant to the shut-down decision.

Cost written off as depreciation on equipment already purchased is always irrelevant.” Do you agree? Why?

Cost written off as depreciation is irrelevant when it pertains to a past cost such as equipment already purchased. But the purchase cost of new equipment to be acquired in the future that will then be written off as depreciation is often relevant.

“Managers will always choose the alternative that maximizes operating income or minimizes costs in the decision model.” Do you agree? Why?

No. Managers often favor the alternative that makes their performance look best so they focus on the measures used in the performance-evaluation model. If the performance-evaluation model does not emphasize maximizing operating income or minimizing costs, managers will most likely not choose the alternative that maximizes operating income or minimizes costs.

When choosing between two alternatives relevant costs are?

What are costs that do not differ between alternatives?

Are the differences in costs between any two alternative courses of action?

How do you determine a decision from different alternatives?