Key Terms
Short-term decision analysis
Identifying information for decisions that will impact the company within 12 months or fewer and using it to choose amon
Differential analysis
Analysis focusing only on the differences between alternatives.
Differential cost
The difference in costs between two alternatives.
Differential revenue
The difference in revenues between two alternatives.
Relevant cost
Cost that influences the decision being made; differs between alternatives.
Quantitative factor
A decision factor that can be measured numerically.
Avoidable cost
Cost that can be eliminated by choosing one alternative over another.
Unavoidable cost
A cost that does not go away in the short run regardless of which alternative is chosen.
Variable costs
Always avoidable; they do not exist if the product is not made or the segment ceases to operate.
Fixed costs
Usually unavoidable in the short run. However, a fixed cost tied specifically to one alternative may be avoidable.
Sunk cost
A cost that has already occurred and cannot be avoided; always irrelevant.
Example
If a lumber company produces board lumber and sawdust as joint products and loses its sawdust buyer, the full joint cost
Opportunity cost
The cost of not choosing the other alternative; the benefit given up.
Special order
A one-time order that does not typically affect current sales.
Normal capacity
The maximum production level achievable without adding production resources; the upper boundary of the relevant range.