Cost 3

  1. Relevant Costs/ revenues
    • 1. expected future cost or revenue
    • 2. cost or revenue must differ from among the alternatives

    use only total relevant revenues and relevant costs in your analysis. This avoids all of the problems associated with per-unit costs
  2. Why we use relevant costs
    • only the relevant costs and revenues make a difference in choosing from among the alternatives
    • supplying additional information distracs one's attention
  3. capacity constraints
    • time there are only 24 hours in a day
    • facilities buildings only have so many square feet, machines can only produce so many units per hour
    • labor in the short run labor is limited in quantity and expertise
    • capital funds available
  4. Assumptions about special orders
    • 1. would not affect regular business in anyway
    • 2. would not raise any anti trust issues
    • 3. would not affect fixed costs (unless specifically defined)
    • 4. would often not require additional variable and selling and administrative costs (read requiredments of problem)
    • 5. would use some otherwise idle capacity
    • 6. likely to be a one time opportunity
  5. Preditory Pricing
    setting prices so low as to drive out competition

    us courts have ruled that it is preditory pricing id you sell below their average variable cost and you actually lose money in order to drive competitors out of business
  6. Discriminatory pricing
    charging different prices to different customers for the same product or service

    not discriminatory if it is cost justified
  7. Purposes of Cost Allocation
    • 1. To provide information about economic decisions
    • 2. to motivate Managers
    • 3. to measure income and asset valuations
    • 4. To justify costs or obtain reimbursement
  8. Criteria for Cost Allocation
    • 1. Cause and Effect - best criteria
    • 2. Benefits received
    • 3. Fairness and Equity
    • 4. Ability to bear - the bigger you are the more water you gotta carry
  9. Problems eliminated by use of the dual rate method
    • 1. Inefficiencies incurred in the service department are not passed on to the user department
    • 2. The cost charged to any one user department is not based on the quantity of products or services used by another department
Card Set
Cost 3