Accounting Chapter 12 Notes PDF

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Professor Gregory Tanzola ...

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Required for Decision Making ➢ Relevant vs. Non-relevant info ○ Sunk costs are irrelevant for future decisions ○ Numeric data that does not differ between two alternatives is not relevant ○ If future cash flow is affected it is relevant ○ Allocated fixed costs are typically not relevant ○ Only avoidable expenses represent future saving and are relevant ➢ Differential Cost Approaches ○ Only compare analyze the costs that differ between alternatives......These are the relevant costs ➢ Total and Differential Cost Approaches ○ Using differential is desirable for two reasons ■ Only rarely will enough information be available to prepare detailed income statements for both alternatives. ■ Mingling irrelevant costs with relevant costs may cause confusion and distract attention away from the information that is really critical. ➢ Adding/Dropping Segments ○ Start with Contribution Margin; this will be the Benefit given up ○ Identify the differential costs ○ Allocated Fixed costs are not relevant as the cost does not go away. It just gets reallocated ➢ Special Order ○ A one-time order that is not considered part of the company’s normal ongoing business ○ Only the incremental costs and benefits are relevant ➢ No constraints on the final ➢ Joint Costs ○ Two or more products produced from a common input are joint products ○ Split off Point ■ Where each joint product can be separated from its joint cost ➢ Sell or Process Further ○ As long as the incremental revenue from processing further exceeds the cost then we will process it further. ○...