ACCOUNTING HELP! 1) How is relevant info. used to make short term decisions? 2)

Question

ACCOUNTING HELP!

1) How is relevant info. used to make short term decisions?

2) Match the concept with the correct terms.

A) Relevant Info
B) Relevant Cost
C) Irrelevant Cost
D) Sunk Cost
E) Differential Analysis

_____ A cost that was incurred in the past and can't be changed regardless of future actions.

_____ A cost that is relevant to a particular decisions because it is a future cost and differs between alternatives.

_____ Expected future data that differs among alternatives.

_____ A cost that was incurred in the past and can't be changed regardless of future actions.

_____ A method that looks at how operating income would differ with each decisions alternative leaving out irrelevant info.

3) List four short-term business decisions:

4) How does pricing affect short-term decisions?

5) What are 3 basic questions managers must answer when setting regular prices for their product or services:

Explanation / Answer

Answer 1:

Relevant information is crucial to make short term decisions. In short term decision making, we focus on relevant information and do an incremental analysis to see whether the option being analyzed would increase operating profit. For example, let us assume we have surplus capacity and we receive a special order at a particular price. To take a decision whether to accept it or not we need to consider whether the price completely covers incremental costs or variable costs. Sunk costs are irrelevant and are not considered for such decisions. However such pricing should not affect regular sales. Even if the special order price covers variable cost and contributes some amount to operating profit, we may accept such order.

Similarly relevant information is used for short term decisions of:

i. choosing between alternatives

2. make or buy decisions

3. selling as is or processing further.

etc.

Answer 2: Correct matches are as follows:

A) Relevant Info: Expected future data that differs among alternatives.

B) Relevant Cost: A cost that is relevant to a particular decision because it is a future cost and differs between alternatives

C) Irrelevant Cost: A cost that was incurred in the past and can't be changed regardless of future actions.

D) Sunk Cost:  A cost that was incurred in the past and can't be changed regardless of future actions.

E) Differential Analysis: A method that looks at how operating income would differ with each decisions alternative leaving out irrelevant info

3) List four short-term business decisions:

i. Whether to accept a special order (at special price)?

ii. Whether to make or buy?

iii. What product mix should be produced when there is a resource constraint?

iv. Whether to purchase larger quantity of raw material offered at a discount?

Answer 4:

With product life cycle getting shorter in quite a few industries pricing itself has become shorter term decision than it was in the past. Pricing affects short term decisions like:

Whether to buy a larger volume of merchandise or raw material at a special price?

Whether to accept a special order and whether acceptance of special order would affect regular price?  

Answer 5:

3 basic questions managers must answer when setting regular prices for their product or services:

1. What is objective of firm in terms of target profit?

2. Whether the company can set prices it wants (price setter) or it has to accept prices as per market (price taker)?

3. What is the price customer will pay and whether such price will cover costs?

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