Podcast
Questions and Answers
What is the definition of opportunity cost in the context of using a machine for production?
What is the definition of opportunity cost in the context of using a machine for production?
- The sum of fixed and variable costs for equipment used.
- The benefit of making another type of product that is lost. (correct)
- The total production cost incurred when making a different product.
- The market price difference between two products.
Which of the following is a qualitative factor that can impact managerial decisions?
Which of the following is a qualitative factor that can impact managerial decisions?
- Return on investment for new machinery.
- Projected sales revenue from a new product.
- Employee morale affected by layoffs. (correct)
- Cost savings from outsourcing production.
What approach is used to focus only on relevant costs and benefits in decision-making?
What approach is used to focus only on relevant costs and benefits in decision-making?
- Historical cost approach.
- Incremental analysis approach. (correct)
- Comprehensive analysis approach.
- Market-based analysis approach.
Why should fixed and variable costs be analyzed separately?
Why should fixed and variable costs be analyzed separately?
What is a potential consequence of discounting prices for select customers?
What is a potential consequence of discounting prices for select customers?
Which type of decisions are considered short-term managerial decisions?
Which type of decisions are considered short-term managerial decisions?
In decision-making, what must relevant costs do?
In decision-making, what must relevant costs do?
Which factor can cloud decision-making by creating information overload?
Which factor can cloud decision-making by creating information overload?
What is a possible outcome of ignoring qualitative factors in management decisions?
What is a possible outcome of ignoring qualitative factors in management decisions?
What role do relevant non-financial information play in managerial decision-making?
What role do relevant non-financial information play in managerial decision-making?
What are relevant costs primarily concerned with?
What are relevant costs primarily concerned with?
Which of the following represents an irrelevant cost?
Which of the following represents an irrelevant cost?
Opportunity cost is defined as:
Opportunity cost is defined as:
When making a decision between two cars, which costs would be considered relevant?
When making a decision between two cars, which costs would be considered relevant?
Which of the following statements is true regarding sunk costs?
Which of the following statements is true regarding sunk costs?
In the context of outsourcing, which type of cost is considered when deciding whether to continue in-house operations?
In the context of outsourcing, which type of cost is considered when deciding whether to continue in-house operations?
Which of the following examples best illustrates an opportunity cost?
Which of the following examples best illustrates an opportunity cost?
Which type of costs should managers ignore when making short-term business decisions?
Which type of costs should managers ignore when making short-term business decisions?
What aspect distinguishes relevant costs from irrelevant costs?
What aspect distinguishes relevant costs from irrelevant costs?
When a company evaluates whether to keep or sell an asset, which type of costs would be most critical to consider?
When a company evaluates whether to keep or sell an asset, which type of costs would be most critical to consider?
Relevant costs are costs that have already been incurred and cannot be changed.
Relevant costs are costs that have already been incurred and cannot be changed.
Sunk costs are considered relevant when making future business decisions.
Sunk costs are considered relevant when making future business decisions.
Opportunity cost represents the benefit forgone from the next best alternative when a choice is made.
Opportunity cost represents the benefit forgone from the next best alternative when a choice is made.
The amount paid to a company's CEO is considered a relevant cost when deciding to close one of the stores.
The amount paid to a company's CEO is considered a relevant cost when deciding to close one of the stores.
Irrelevant costs are those that do not vary between different alternatives and do not affect decision-making.
Irrelevant costs are those that do not vary between different alternatives and do not affect decision-making.
What differentiates relevant costs from irrelevant costs in decision-making?
What differentiates relevant costs from irrelevant costs in decision-making?
How does opportunity cost manifest in managerial decision-making?
How does opportunity cost manifest in managerial decision-making?
Why is a sunk cost considered irrelevant when making a future business decision?
Why is a sunk cost considered irrelevant when making a future business decision?
In the context of buying a new car, what factors would be classified as relevant costs?
In the context of buying a new car, what factors would be classified as relevant costs?
How should managers approach the analysis of fixed and variable costs in short-term decisions?
How should managers approach the analysis of fixed and variable costs in short-term decisions?
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Study Notes
Relevant and Irrelevant Costs
- Relevant costs are incurred in the future and impact decision-making, differing between alternatives.
- Example: When buying a car, each model has unique costs (invoice price, sales tax, insurance).
- Irrelevant costs do not influence decisions; they remain the same across alternatives.
- Sunk costs, incurred in the past, are irrelevant for current decisions, e.g., the purchase price of an old car.
Opportunity Cost
- Opportunity cost is the potential benefit lost when choosing one option over another.
- Example: If a machine is used for one product, the potential profit from another product is the opportunity cost.
Non-Financial Considerations
- Non-financial factors also influence managerial decisions, such as community impact or employee morale.
- Qualitative characteristics must also differ between alternatives and occur in the future.
Short-Term Business Decisions
- Common short-term decisions include accepting special orders, product discontinuation, determining product mix, and outsourcing.
- Importance of analyzing costs that are relevant to the specific decision rather than entire income statements.
Incremental Analysis Approach
- Focuses on the change in operating income for each decision alternative.
- Excludes irrelevant information and costs that do not differ between alternatives to prevent information overload.
Cost Behavior
- Fixed costs and variable costs behave differently and should be analyzed separately to provide clarity in decision-making.
Relevant and Irrelevant Costs
- Relevant costs are incurred in the future and impact decision-making, differing between alternatives.
- Example: When buying a car, each model has unique costs (invoice price, sales tax, insurance).
- Irrelevant costs do not influence decisions; they remain the same across alternatives.
- Sunk costs, incurred in the past, are irrelevant for current decisions, e.g., the purchase price of an old car.
Opportunity Cost
- Opportunity cost is the potential benefit lost when choosing one option over another.
- Example: If a machine is used for one product, the potential profit from another product is the opportunity cost.
Non-Financial Considerations
- Non-financial factors also influence managerial decisions, such as community impact or employee morale.
- Qualitative characteristics must also differ between alternatives and occur in the future.
Short-Term Business Decisions
- Common short-term decisions include accepting special orders, product discontinuation, determining product mix, and outsourcing.
- Importance of analyzing costs that are relevant to the specific decision rather than entire income statements.
Incremental Analysis Approach
- Focuses on the change in operating income for each decision alternative.
- Excludes irrelevant information and costs that do not differ between alternatives to prevent information overload.
Cost Behavior
- Fixed costs and variable costs behave differently and should be analyzed separately to provide clarity in decision-making.
Relevant and Irrelevant Costs
- Relevant costs are incurred in the future and impact decision-making, differing between alternatives.
- Example: When buying a car, each model has unique costs (invoice price, sales tax, insurance).
- Irrelevant costs do not influence decisions; they remain the same across alternatives.
- Sunk costs, incurred in the past, are irrelevant for current decisions, e.g., the purchase price of an old car.
Opportunity Cost
- Opportunity cost is the potential benefit lost when choosing one option over another.
- Example: If a machine is used for one product, the potential profit from another product is the opportunity cost.
Non-Financial Considerations
- Non-financial factors also influence managerial decisions, such as community impact or employee morale.
- Qualitative characteristics must also differ between alternatives and occur in the future.
Short-Term Business Decisions
- Common short-term decisions include accepting special orders, product discontinuation, determining product mix, and outsourcing.
- Importance of analyzing costs that are relevant to the specific decision rather than entire income statements.
Incremental Analysis Approach
- Focuses on the change in operating income for each decision alternative.
- Excludes irrelevant information and costs that do not differ between alternatives to prevent information overload.
Cost Behavior
- Fixed costs and variable costs behave differently and should be analyzed separately to provide clarity in decision-making.
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