Managerial Accounting Chapter 5

Allocated fixed costs

Fixed costs that can be readily assigned to a certain project, product or business segment

Avoidable Costs

Type of Relevant Cost
Costs that occur only under certain conditions

Common fixed costs

Cost of providing the factory’s capacity and/or keeping the factory itself in operation
- Will still be incurred when one product line/business segment is dropped
- Are not differential
- Are not relevant in make vs. buy or keep vs. drop decisions bc they’re for the facility

Differential Approach

A type of analysis which focuses on costs and benefits which differ between alternatives
AKA Relevant Cost Approach

Differential Costs

Type of Relevant Cost
When a cost differs in amount between one choice and another, that helps narrow decision-making.

Direct Fixed Costs

Fixed costs that are clearly attributable to a product line, segment or division
→ Avoidable and Relevant

Insource v. Outsource

Decisions where a company compares the cost/logic of manufacturing a product vs. buying it from a supplier

→ Can be done through total cost approach or relevant cost approach

Keep v. Drop

Decisions in which a company compares whether to keep or drop a product line or business segment

Offshoring

Using a service provider in another country

Opportunity Costs

Costs and benefits of the path not taken when a decision is made,
potential benefits - potential costs
(never recorded)

Product Mix Decisions

Decisions in which companies determine which specific products and services and how many to make, stock or offer

Relevant Cost Approach

Analysis focusing on costs and benefits that differ between alternatives
AKA differential approach

Relevant Costs

Costs that relate to the specific decision being made
1. Differential Costs
2. Avoidable Costs
3. Future costs

Segment Margin

Measures the economic value each business segment provides to an organization

Special Orders

Sales opportunities that companies contemplate in the short term to respond to a customer’s special request

Total Cost Approach

A method of decision-making which reviews all costs and options

Core Process

Process that a company must control in-house and not outsource

Critical Process

Processes that can potentially be outsourced to in-class vendors

Commodity Process

Processes that can be outsource without losing competitive advantage