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SUNK COSTS
- are costs that have been already incurred and cannot be recovered. They are unavoidable.
o Includes the cost of the existing machine and the accompanying accumulated depreciation
DIFFERENTIAL COST
- refers to the difference between the cost of two alternative decisions.
INCREMENTAL COST (minimum acceptable price)

- is the total cost incurred due to an additional unit of product being produced.
ABSORPTION COST
- is a managerial accounting method that includes both the variable and fixed overhead costs of producing a particular
product.
OPPORTUNITY COST
- represents the potential benefits that a business, an investor, or an individual consumer misses out on when choosing one
alternative over another.
o Opportunity cost of a resource with excess capacity is zero.
o If capacity is constrained, opportunity cost is indeterminable.
FIVE-STEP DECISION PROCESS

A = Make predictions about future costs
D = Choose an alternative
C = Implement the decision
B = Evaluate performance to provide feedback
RELEVANT COSTS = TOTAL VARIABLE COSTS * Selling price + ELIMINATED FIXED COSTS
- is a term that describes the changing costs of a particular decision.
- Businesses use relevant costs to determine if one decision is more cost-effective than another.
- those costs that differ between alternatives, which is the incremental cost.
- Relevant costs include:
o Acquisition cost of the new machine
o Current disposal/salvage value of the existing machine
o Annual operating expenses for the existing and the new machine
Target selling price - Variable costs = Contribution margin per unit/operating profits
Minimum acceptable price for special order = Total Variable costs
Total Variable Costs + Total Fixed Costs = Full Cost per unit
Total Variable Costs = Minimum Acceptable Price/Incremental Costs
Eliminated = Avoided = Includes in the calculation of relevant costs
To encourage sales persons to promote specific products, a company may want to provide marketing incentives such as higher sales
commissions for products contributing the most to profits. Companies may also want to educate salespeople about the effects of
constrained resources.
MAKE-OR-BUY DECISION
- Also referred to as an outsourcing decision
- compares the costs and benefits associated with producing a necessary good or service internally to the costs and benefits
involved in hiring an outside supplier for the resources in question.
PRODUCT MIX DECISIONS

- refers to the decisions regarding adding a new or eliminating any existing product from the product mix, adding a new
product line, lengthening any existing line, or bringing new variants of a brand to expand the business and to increase the
profitability.
- Help determine how to maximize operating profits
- Always focus on maximizing total contribution margin
- Determining which products should be produced when the plant is operating at full capacity
• For determining the best mix of products, the one with the LEAST amount of influence is the corporate office costs
allocated to each product
Constraints may include:

• The availability of direct materials in manufacturing
• Linear square feet of display space for a retailer
• Direct labor in the service industry
Book Value
- The difference between the original cost of an asset and the accumulated depreciation
➢ Managers tend to favor the alternative that makes their performance look best. Therefore, they tend to
focus on the measures used in the performance evaluation model.
➢ If management takes a multiple-year view in the decision model and judges success according to the
current year's results, a problem will occur in the performance evaluation model.
➢ Top management faces a persistent challenge to make sure that the performance evaluation model of
lower level managers is not consistent with the decision model.
THREE STEPS INVOLVED IN LINEAR PROGRAMMING

• Determining the objective
• Determining the basic relationship
• Computing the optimal solution
o In the linear programming, the goals of management are expressed in an objective function
AVOIDABLE COSTS
- are those costs eliminated when a part, product, product line, or business segmented is discontinued

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SUNK COSTS

INCREMENTAL COST (minimum acceptable price)

FIVE-STEP DECISION PROCESS

PRODUCT MIX DECISIONS

Constraints may include:

THREE STEPS INVOLVED IN LINEAR PROGRAMMING

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