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What information is relevant?
depends on the decision being made
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Decision making
is essentially choosing among several courses of action
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To determine whether information is relevant, accountants should use 2 criteria:
- 1. Information must be an expected revenue or cost and
- 2. It must have an element of difference among the alternatives
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Relevant information
the predicted future costs and revenues that will differ among the alternatives
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Decision model
any method used for making a choice, sometimes requiring elaborate quantitative procedures
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A decision model may also be ...
simple
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In the best of all possible worlds, information used for decision making would be perfectly ... and ...
relevant, accurate
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The degree to which information is relevant or precise often depends on the degree to which it is. 2 measures:
Qualitative and Quantitative
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Avoidable costs
costs that will not continue if an ongoing operation is changed or deleted
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Unavoidable costs
costs that continue even if an operation is halted
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A limiting factor/scare resource ... the production or sale of a product or service
restricts/constrains
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Pricing decisions
- 1. Setting the price of a new or refined product
- 2. Setting the price of productd sold under private labels
- 3. Responding to a new price of a competitior
- 4. Pricing bids in both sealed and open bidding situation
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Perfect competition
all competing firms sell the same type of product at the same price
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Marginal cost
the additional cost resulting from producing and selling one additional unit
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Marginal revenue
the additional revenue resulting from sale of one additional unit
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Imperfect competition
the price a firm charges for a unit will influence the quantity of units it sells
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Price elasticity
the effect of price changes on sales volume
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Accountants seldom compute ... curves and ... curves
marginal revenue, marginal cost
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Accountants use estimates based on ...
judgment
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Accountants examine ... not the range of ...
selected volumes, possible volumes
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2 types of pricing:
predatory pricing and discriminatory pricing
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Cost-Plus Pricing
setting prices by computing an average cost and adding a markup
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... can be based on a host of different markups that are in turn based on a host of different definitions of cost
Target prices
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Target Sales price as ... (4)
- 1. a percentage of variable manufacturing costs
- 2. a percentage of total variable costs
- 3. a percentage of full costs (Vc + Fc)
- 4. a percentage of total manufacturing cost
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The contribution margin approach offers ...
more detailed information
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The contribution margin approach allows managers to prepare ...
price scheduels at different volume levels
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Target pricing with full costing presumes a giving ...
volume level
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Advantages of Total Manufacturing and Full-Cost Approaches (7)
- 1. In the long run, a firm must recover all costs to stay in business
- 2. It may indicate what competitors might charge
- 3. It meets the cost-benefit test
- 4. It copes with uncertainty
- 5. It tends to promote price stability
- 6. It provides the most defensible basis for justifying price to all interest parties
- 7. It simplifies pricing decisions
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Target costing sets a cost ... before product is created pr even designed
before
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Value engineering
a cost reduction technique, used primarily during design
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Kaizen costing
the Japanese word for continous improvement
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