AF 211 CH 5

  1. What information is relevant?
    depends on the decision being made
  2. Decision making
    is essentially choosing among several courses of action
  3. 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
  4. Relevant information
    the predicted future costs and revenues that will differ among the alternatives
  5. Decision model
    any method used for making a choice, sometimes requiring elaborate quantitative procedures
  6. A decision model may also be ...
  7. In the best of all possible worlds, information used for decision making would be perfectly ... and ...
    relevant, accurate
  8. The degree to which information is relevant or precise often depends on the degree to which it is. 2 measures:
    Qualitative and Quantitative
  9. Avoidable costs
    costs that will not continue if an ongoing operation is changed or deleted
  10. Unavoidable costs
    costs that continue even if an operation is halted
  11. A limiting factor/scare resource ... the production or sale of a product or service
  12. 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
  13. Perfect competition
    all competing firms sell the same type of product at the same price
  14. Marginal cost
    the additional cost resulting from producing and selling one additional unit
  15. Marginal revenue
    the additional revenue resulting from sale of one additional unit
  16. Imperfect competition
    the price a firm charges for a unit will influence the quantity of units it sells
  17. Price elasticity
    the effect of price changes on sales volume
  18. Accountants seldom compute ... curves and ... curves
    marginal revenue, marginal cost
  19. Accountants use estimates based on ...
  20. Accountants examine ... not the range of ...
    selected volumes, possible volumes
  21. 2 types of pricing:
    predatory pricing and discriminatory pricing
  22. Cost-Plus Pricing
    setting prices by computing an average cost and adding a markup
  23. ... can be based on a host of different markups that are in turn based on a host of different definitions of cost
    Target prices
  24. 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
  25. The contribution margin approach offers ...
    more detailed information
  26. The contribution margin approach allows managers to prepare ...
    price scheduels at different volume levels
  27. Target pricing with full costing presumes a giving ...
    volume level
  28. 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
  29. Target costing sets a cost ... before product is created pr even designed
  30. Value engineering
    a cost reduction technique, used primarily during design
  31. Kaizen costing
    the Japanese word for continous improvement
Card Set
AF 211 CH 5
midterm 2 study guide