ACC 628 Terms

Relevant Cost

A future cost that differs between the alternatives. Both tests, or it is out.

Sunk Cost

Already incurred. Never relevant. Identical in every column.

Avoidable Cost

Goes away if you choose one way. Only avoidable fixed costs are relevant.

Opportunity Cost

Contribution given up on the next best use of a resource you are consuming.

Special Order (Idle Capacity)

Accept if Price > Variable Cost per Unit + (Order - Specific Costs / Units Ordered)

Special Order (At Capacity)

Accept if Price > Variable Cost per Unit + (Order-Specific Cost / Units Ordered) + (contribution given up on displaced work / units ordered)

Make or Buy

Compare variable cost + avoidable fixed + opportunity cost, against purchase price

Drop of Segment

Drop only if avoidable fixed cost saved > Contribution margin lost and the freed capacity has no better use

Constrained Resource

One constraint: rank by contribution margin per unit of constrained resource.

Two or more constraints: ranking fails.

Sell or Process

Process if Additional Revenue > Additional Cost

Costs incurred before the split-off point are irrelevant o what you do after it

Equipment Replacement

Compare operating cost savings against the new machine, net of what the old one fetches, ignoring the time value of money.

Book value of old equipment

Never relevant. Written off either way, so it sits in both columns.

Loss on Disposal

Not a cost of replacing. It is recognition of a loss that already exists.

NPV Decision Rule

Accept if NPV > 0

Reject if NPV < 0

Indifferent at exactly 0

Cash Paid of Received Today

Factor of 1.0000

Never discount year zero

Working Capital

Outflow at the start

Inflow at the end

The two do not cancel

Mutually Exclusive Projects

Take the highest NPV, provided they cover the same span of time

Unequal Lives

Divide each NPV by the annuity factor for its own life, at the required rate, and compare per year

Depreciation

Not a cash flow. Enters only through taxes, and there are none here

Interest on project debt

A real payment, but never entered in the analysis: its cost is already inside the discount rate

Ratio against amount

ROI is a rate; residual income and EVA are dollars. They can disagree.

Which measure will not fight a good project

Residual income or EVA. ROI benchmarks against the division’s own average, which is the wrong bar. The decision itself is still NPV.

Leading Indicator

A measure of what is about to happen, not what already did

The annuity-factor shortcut

Valid only when the level annual amount is the project’s whole cash flow.

IRR decision rule

Accept if IRR > required rate. Agrees with NPV on accept or reject for a conventional project, meaning the cash flows change sign once

Mutually exclusive projects

Rank by NPV, provided they cover the same span of time. never by IRR, which ignores scale

Unequal lives

Divide each NPV by the annuity factor for its own life, at the required rate, and compare per year

When methods disagree

Follow NPV

Screening decision

Does one proposal clear a minimum standard?

Preference decision

Which of several acceptable proposals do we choose?

Capital rationing

Rank by profitability index and fill the budget from the top.

Post-audit

Compare actual results to the proposal, to improve the next forecast