Chapter 13: Differential Analysis

Vocabulary flashcards covering the key terms, cost classifications, and decision-making concepts from Chapter 13 Differential Analysis.

Differential Analysis

A decision-making approach focusing on the future costs and benefits that differ between alternatives, while treating everything else as irrelevant.

Differential Cost

A future cost that differs between any two alternatives.

Differential Revenue

Future revenue that differs between any two alternatives.

Incremental Cost

An increase in cost between two alternatives.

Avoidable Cost

A cost that can be eliminated by choosing one alternative over another.

Sunk Cost

A cost that has already been incurred and cannot be changed regardless of what a manager decides to do; it is always irrelevant when choosing among alternatives.

Opportunity Cost

The potential benefit that is given up or foregone when one alternative is selected over another; it is not an actual cash outlay and is not recorded in the formal accounts.

Vertical Integration

A condition in which a company is involved in more than one activity in the entire value chain.

Make or Buy Decision

A decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier.

Special Order

A one-time order that is not considered part of the company's normal ongoing business, analyzed using only incremental costs and benefits.

Volume Trade-Off Decisions

Decisions forced upon companies when they lack sufficient capacity to produce all demanded products and volumes, requiring the sacrifice of some products in favor of others to maximize profits.

Constraint

A limited resource of some type that restricts a company's ability to satisfy demand.

Bottleneck

The specific machine or process that limits overall output; it represents the constraint.

Joint Products

Two or more products produced from a single raw material input.

Split-off Point

The point in the manufacturing process where joint products can be recognized as separate products.

Sell or Process Further Decision

A decision as to whether a joint product should be sold at the split-off point or processed further beyond it.