Decision Making and Relevant Information
Cost Accounting: A Managerial Emphasis
Chapter 11
Decision Making and Relevant Information
Copyright © 2013 Pearson Canada Inc.
11 - 1
Cost Accounting: A Managerial Emphasis
Decision Model
• The process of making a choice, often involving both quantitative and qualitative analyses • Quality of the choice depends upon the qualify of the information obtained
– Perfect information is never available
1
Copyright © 2013 Pearson Canada Inc.
11 - 2
Cost Accounting: A Managerial Emphasis
Decision Model
• May involve more than one outcome
– Uncertainty refers to outcomes not contemplated during the decision-making process – Risk refers to outcomes that have been contemplated, and are quantified as probabilities
1
Copyright © 2013 Pearson Canada Inc.
11 - 3
Cost Accounting: A Managerial Emphasis
Relevance
• Relevant Information has two characteristics:
– It occurs in the future – It differs among the alternative courses of action
• Relevant Costs – expected future costs • Relevant Revenues – expected future revenues
1
Copyright © 2013 Pearson Canada Inc.
11 - 4
Cost Accounting: A Managerial Emphasis
Irrelevance
• Historical costs are past costs that are irrelevant to decision making
– Also called Sunk Costs
• Information that does not change between alternative courses of action is irrelevant
1
Copyright © 2013 Pearson Canada Inc.
11 - 5
Cost Accounting: A Managerial Emphasis
Terminology
• Incremental Cost
– The additional total cost incurred for an activity
• Differential Cost
– The difference in total cost between two alternatives
• Incremental Revenue
– The additional total revenue from an activity
• Differential Revenue
– The difference in total revenue between two alternatives
1
Copyright © 2013 Pearson Canada Inc.
11 - 6
Cost Accounting: A Managerial Emphasis
Types of Information
• Quantitative factors that can be measured in numerical terms
– Can be financial or non-financial
• Qualitative factors that cannot be measured in
Chapter 11
Decision Making and Relevant Information
Copyright © 2013 Pearson Canada Inc.
11 - 1
Cost Accounting: A Managerial Emphasis
Decision Model
• The process of making a choice, often involving both quantitative and qualitative analyses • Quality of the choice depends upon the qualify of the information obtained
– Perfect information is never available
1
Copyright © 2013 Pearson Canada Inc.
11 - 2
Cost Accounting: A Managerial Emphasis
Decision Model
• May involve more than one outcome
– Uncertainty refers to outcomes not contemplated during the decision-making process – Risk refers to outcomes that have been contemplated, and are quantified as probabilities
1
Copyright © 2013 Pearson Canada Inc.
11 - 3
Cost Accounting: A Managerial Emphasis
Relevance
• Relevant Information has two characteristics:
– It occurs in the future – It differs among the alternative courses of action
• Relevant Costs – expected future costs • Relevant Revenues – expected future revenues
1
Copyright © 2013 Pearson Canada Inc.
11 - 4
Cost Accounting: A Managerial Emphasis
Irrelevance
• Historical costs are past costs that are irrelevant to decision making
– Also called Sunk Costs
• Information that does not change between alternative courses of action is irrelevant
1
Copyright © 2013 Pearson Canada Inc.
11 - 5
Cost Accounting: A Managerial Emphasis
Terminology
• Incremental Cost
– The additional total cost incurred for an activity
• Differential Cost
– The difference in total cost between two alternatives
• Incremental Revenue
– The additional total revenue from an activity
• Differential Revenue
– The difference in total revenue between two alternatives
1
Copyright © 2013 Pearson Canada Inc.
11 - 6
Cost Accounting: A Managerial Emphasis
Types of Information
• Quantitative factors that can be measured in numerical terms
– Can be financial or non-financial
• Qualitative factors that cannot be measured in