Cost Accounting Chapter 11

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Horngren, C.T., Datar, S.M. and Foster, G. (2003) Cost Accounting - A Managerial Emphasis, Pearson Education, Inc., New Jersey, Eleventh Edition CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION 11-1 The five steps in the decision process outlined in Exhibit 11-1 of the text are:
1. 2. 3. 4. 5. Obtain information Make predictions about future costs Choose an alternative Implement the decision Evaluate performance to provide feedback

11-2 Relevant costs are expected future costs that differ among the alternative courses of action being considered. Historical costs are irrelevant because they are past costs and, therefore, cannot differ among alternative future courses of action.

11-3 No. Relevant costs are defined as those
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11-14 The three steps in solving a linear programming problem are:
1. 2. 3. Determine the objective function. Specify the constraints. Compute the optimal solution.

11-15 The text outlines two methods of determining the optimal solution to an LP problem:
1. Trial-and-error solution approach 2. Graphical solution approach Most LP applications in practice use standard software packages that rely on the simplex method to compute the optimal solution.

11-2

11-16 (20 min.) Disposal of assets.
1. This is an unfortunate situation, yet the $80,000 costs are irrelevant regarding the decision to remachine or scrap. The only relevant factors are the future revenues and future costs. By ignoring the accumulated costs and deciding on the basis of expected future costs, operating income will be maximized (or losses minimized). The difference in favor of remachining is $3,000: (a) Remachine Future revenues Deduct future costs Operating income Difference in favor of remachining $35,000 30,000 $ 5,000 $3,000 (b) Scrap $2,000 – $2,000

2. This, too, is an unfortunate situation. But the $100,000 original cost is irrelevant to this decision. The difference in relevant costs in favor of rebuilding is $7,000 as follows: (a) Replace New truck Deduct current disposal price of existing truck Rebuild existing truck $102,000 10,000 – $ 92,000 $7,000 (b) Rebuild – – $85,000 $85,000

Difference in favor of rebuilding

Note, here, that the current disposal price of
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