Managerial Accounting Chapter 13

Relevant costs and relevant benefits

considered when making decisions

Irrelevant costs and benefits

ignored when making decisions

differential analysis

focusing on the future costs and benefits that differ between the alternatives

Differential cost

future cost that differs between any two alternatives

Differential revenue

future revenue that differs between any two alternatives

Incremental cost

increase in cost between two alternatives

avoidable cost

cost that can be eliminated by choosing 1 alternative over another

Sunk costs

always irrelevant

already been incurred and cannot be changed regardless of what a manager decides to do

Opportunity costs

always considered

potential benefit that is given up when one alternative is selected over another

Vertically integrated

when a company is involved in more than one activity in the entire value chain

make or buy decision

decision to carry out one of the activites in the value chain internlly, rahter than to buy externally from a supplier

Vertical integration advantages

smoother flow of parts and materials, better quality control, realize profits

Special order

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