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Chapter 16 - Costs for decision making. After reading this chapter, you should be able to answer the following questions: What are the meaning and application of the following “cost” terms: differential, allocated, sunk, and opportunity? How are costs determined to be relevant for short-run decisions? What is the special pricing decision when a firm is at full vs. idle capacity? . | 2008 The McGraw Hill Companies Inc. All Rights Reserved. McGraw Hill Irwin Copyright 2014 by The McGraw Hill Companies Inc. All rights reserved. Chapter 16 Costs for Decision Making PowerPoint Authors Susan Coomer Galbreath Ph.D. CPA Charles W. Caldwell D.B.A. CMA Jon A. Booker Ph.D. CPA CIA Cynthia J. Rooney Ph.D. CPA McGraw Hill Irwin Copyright 2014 by The McGraw Hill Companies Inc. All rights reserved. 1-3 LO 1 Relevant Cost Information Relevant Irrelevant Differential Cost -- will differ Allocated Cost -- a common cost that according to alternative activities has been arbitrarily assigned to a being considered. product or activity. Opportunity Cost -- income foregone Sunk Cost -- has already been incurred by choosing one alternative over and will not change. another. McGraw Hill Irwin 16 3 2008 The McGraw Hill Companies Inc. All Rights Reserved. 1-4 LO 3 The Special Pricing Decision The decision to accept additional The decision to accept additional business should be based on business should be based on incremental costs and incremental incremental costs and incremental revenues. revenues. Incremental amounts are those Incremental amounts are those amounts that occur if the company amounts that occur if the company decides to accept the new decides to accept the new business. business. McGraw Hill Irwin 16 4 2008 The McGraw Hill Companies Inc. All Rights Reserved. 1-5 LO 3 The Make or Buy Decision Should I continue to make the part or should I buy it McGraw Hill Irwin 16 5 2008 The McGraw Hill Companies Inc. All Rights Reserved. 1-6 LO 3 The Make or Buy Decision The relevant cost of making a component is the cost that can be avoided by buying the component from an outside supplier. Decision rule Costs avoided must be greater than outside supplier s price to consider buying the component. McGraw Hill Irwin 16 6 2008 The McGraw Hill Companies Inc. All Rights Reserved. 1-7 LO 3 Short-Term Allocation of Scarce Resources Managers often face the problem of deciding
