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AU / Accounting / ACCT 2210 / What is the definition of avoidable cost?

What is the definition of avoidable cost?

What is the definition of avoidable cost?

Description

School: Auburn University
Department: Accounting
Course: PRINCIPLES OF MANAGERIAL ACCOUNTING
Professor: Fetsch
Term: Fall 2016
Tags: Accounting
Cost: 50
Name: Managerial Accounting Final Exam
Description: This covers the final for managerial accounting that is not cumulative
Uploaded: 04/30/2018
18 Pages 63 Views 4 Unlocks
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Accounting Study Guide


What is the definition of avoidable cost?



ACCT CH. 12

∙ Avoidable cost

o Cost that can be eliminated, in whole or in part, by choosing one  alternative over another. Avoidable cost are relevant costs.  

Unavoidable costs are irrelevant costs

∙ Decision making  

o The 2-step process

 1. Eliminate costs and benefits that do not differ between  

alternatives

 2. Use the remaining costs and benefits that differ between  

alternatives in making the decision. The costs that remain are  

the differential, or avoidable, costs.

∙ Know how to  Don't forget about the age old question of What is the percent by mass?

o Identifying relevant costs

∙ One of the most important decisions managers make is whether to o Add or drop a business segment. Ultimately a decision to drop an old  segment or add a new one is going to hinge primarily on its financial  impact


What is the definition of decision making?



Don't forget about the age old question of What is the function of the five major vessels in the body?

∙ Know how to  

o Comparative income approach

∙ Be aware that allocated fixed costs can distort the keep/drop decision ∙ Including unavoidable common fixed costs make the product line o Appear to be unprofitable, when in fact dropping the product line would decrease the company’s overall net operating income If you want to learn more check out Who led the african americans to launch a prolonged assault on school segregation?
Don't forget about the age old question of What is the function of iron in the human body?
Don't forget about the age old question of How does our color theory explain the fact that people see red as being similar to violet?

∙ know how to prepare a make or buy analysis

∙ vertical integration- advantages

o


How to identify relevant costs?



∙ Vertical integration- disadvantages

o

∙ Opportunity costs

o Not actual cash outlays and are not recorded in the formal accounts of  an org

o Is the benefit that is foregone because of pursuing some course of  action

∙ Know how to  

o Prepare an analysis showing whether a special order should be  accepted

∙ Special order If you want to learn more check out What are the professional roles and responsibilities?

o One-time order that is not considered part of the company’s normal  ongoing business

∙ When analyzing a special order

o Only the incremental costs and benefits are relevant

∙ Know how to  

o Determine the most profitable use of a constrained resource ∙ Volume trade-trade off decisions

o ∙ Constraint

o When a limited resource of some type restricts the company’s ability to satisfy demand

∙ bottleneck

o the machine or process that is limiting overall output

o this is the constraint

∙ utilization of a constrained resource

o

∙ Know how to  

o Determine the value of obtaining more of the constrained resource

∙ Increasing the capacity of a constrained resource should lead to the  increased production and sales

∙ Know how to  

o Prepare an analysis showing whether joint products should be sold at  the split off point or processed further

∙ Joint product costs

o

∙ Joint products

o

∙ Pittfalls of allocation

o

∙ ABC (activity-based costing)

o Can be used to help identify potentially relevant costs for decision making purposes

ACCT CH. 13

∙ Payback method, net present value, and Internal rate of return o All focus on analyzing the cash flows associated with capital  

investment projects

∙ Simple rate of return method focuses on

o Incremental net operating income

∙ Typical cash outflows  

o

Repairs  

and  

maintena

nce

Increment

al  

Initial  

investmen

t

Working  

capital

operating  costs

∙ Typical cash outflows

o

Salvage  

value

Increment

al  

revenues

Reduction  

of costs

Release of  

working  

capital

∙ Projects that promise earlier returns are preferable to those that promise later returns

∙ Best way to recognize time value of money are those that involve o Discounted cash flows

∙ Know how to  

o Determine the payback period for an investment

∙ Payback period

o The length of time that it takes for a project to recoup its initial cost out of the cash receipts that it generates

∙ The payback method focuses on the payback period

o It does not consider the time value of money

∙ It can be calculated by  

o ∙ Short comings of payback method

o

Ignores the  

time value

of money.

Ignores  

cash

flows after  the payback period.

Shorter  

payback  

period does  not always  mean a  

more  

desirable  investment.

∙ Strengths of payback method o

Serves as  

screening  

tool.

∙ Know how to  

Identifies  investmen ts that  

recoup  

cash  

investmen ts quickly.

Identifies  products  that  

recoup  

initial  

investmen t quickly.

o Evaluate the acceptability of an investment project using the net  present value method

∙ NPV Method

o 2 assumptions

 1. All cash flows other than the initial investment occur at the  end of periods

 2. All cash flows generated by an investment project are  

immediately reinvested at a rate of return equal to the discount  rate

∙ Choosing a discount rate

o The company’s cost of capital is usually regarded as the minimum  required rate of return

o Cost of capital

 Avg. return the company must pay to its long-term creditors and  stockholders

∙ The net present value automatically

o Provides for return of the original investment

∙ Preference decision—ranking of investment projects

o ∙ The net present value of one project cannot be directly compared to the net  present value of another project unless the investments are equal ∙ Know how to  

o Compute the simple rate of return for an investment

∙ Simple rate of return equation

o ∙ Criticism of simple rate of return

o

The same  

project  

Ignores the  

time value

of money.

may appear  desirable in  some  

years and  undesirable  in other  

years.

Accounting Study Guide

ACCT CH. 12

∙ Avoidable cost

o Cost that can be eliminated, in whole or in part, by choosing one  alternative over another. Avoidable cost are relevant costs.  

Unavoidable costs are irrelevant costs

∙ Decision making  

o The 2-step process

 1. Eliminate costs and benefits that do not differ between  

alternatives

 2. Use the remaining costs and benefits that differ between  

alternatives in making the decision. The costs that remain are  

the differential, or avoidable, costs.

∙ Know how to  

o Identifying relevant costs

∙ One of the most important decisions managers make is whether to o Add or drop a business segment. Ultimately a decision to drop an old  segment or add a new one is going to hinge primarily on its financial  impact

∙ Know how to  

o Comparative income approach

∙ Be aware that allocated fixed costs can distort the keep/drop decision ∙ Including unavoidable common fixed costs make the product line o Appear to be unprofitable, when in fact dropping the product line would decrease the company’s overall net operating income

∙ know how to prepare a make or buy analysis

∙ vertical integration- advantages

o

∙ Vertical integration- disadvantages

o

∙ Opportunity costs

o Not actual cash outlays and are not recorded in the formal accounts of  an org

o Is the benefit that is foregone because of pursuing some course of  action

∙ Know how to  

o Prepare an analysis showing whether a special order should be  accepted

∙ Special order

o One-time order that is not considered part of the company’s normal  ongoing business

∙ When analyzing a special order

o Only the incremental costs and benefits are relevant

∙ Know how to  

o Determine the most profitable use of a constrained resource ∙ Volume trade-trade off decisions

o ∙ Constraint

o When a limited resource of some type restricts the company’s ability to satisfy demand

∙ bottleneck

o the machine or process that is limiting overall output

o this is the constraint

∙ utilization of a constrained resource

o

∙ Know how to  

o Determine the value of obtaining more of the constrained resource

∙ Increasing the capacity of a constrained resource should lead to the  increased production and sales

∙ Know how to  

o Prepare an analysis showing whether joint products should be sold at  the split off point or processed further

∙ Joint product costs

o

∙ Joint products

o

∙ Pittfalls of allocation

o

∙ ABC (activity-based costing)

o Can be used to help identify potentially relevant costs for decision making purposes

ACCT CH. 13

∙ Payback method, net present value, and Internal rate of return o All focus on analyzing the cash flows associated with capital  

investment projects

∙ Simple rate of return method focuses on

o Incremental net operating income

∙ Typical cash outflows  

o

Repairs  

and  

maintena

nce

Increment

al  

Initial  

investmen

t

Working  

capital

operating  costs

∙ Typical cash outflows

o

Salvage  

value

Increment

al  

revenues

Reduction  

of costs

Release of  

working  

capital

∙ Projects that promise earlier returns are preferable to those that promise later returns

∙ Best way to recognize time value of money are those that involve o Discounted cash flows

∙ Know how to  

o Determine the payback period for an investment

∙ Payback period

o The length of time that it takes for a project to recoup its initial cost out of the cash receipts that it generates

∙ The payback method focuses on the payback period

o It does not consider the time value of money

∙ It can be calculated by  

o ∙ Short comings of payback method

o

Ignores the  

time value

of money.

Ignores  

cash

flows after  the payback period.

Shorter  

payback  

period does  not always  mean a  

more  

desirable  investment.

∙ Strengths of payback method o

Serves as  

screening  

tool.

∙ Know how to  

Identifies  investmen ts that  

recoup  

cash  

investmen ts quickly.

Identifies  products  that  

recoup  

initial  

investmen t quickly.

o Evaluate the acceptability of an investment project using the net  present value method

∙ NPV Method

o 2 assumptions

 1. All cash flows other than the initial investment occur at the  end of periods

 2. All cash flows generated by an investment project are  

immediately reinvested at a rate of return equal to the discount  rate

∙ Choosing a discount rate

o The company’s cost of capital is usually regarded as the minimum  required rate of return

o Cost of capital

 Avg. return the company must pay to its long-term creditors and  stockholders

∙ The net present value automatically

o Provides for return of the original investment

∙ Preference decision—ranking of investment projects

o ∙ The net present value of one project cannot be directly compared to the net  present value of another project unless the investments are equal ∙ Know how to  

o Compute the simple rate of return for an investment

∙ Simple rate of return equation

o ∙ Criticism of simple rate of return

o

The same  

project  

Ignores the  

time value

of money.

may appear  desirable in  some  

years and  undesirable  in other  

years.

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