54 7.6 Review of Cost Terms Used in Differential Analysis
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Last updated
- Dec 28, 2020
Learning Objectives
- Understand cost terms used in differential analysis.
Question: We’ve introduced many new terms in this chapter. What are these important terms, and how do they relate to differential analysis?
Key Takeaway
When deciding between alternatives, only those revenues and costs that differ from one alternative course of action to another are relevant. Avoidable costs, opportunity costs, and direct fixed costs typically fall into this category. Revenues and costs that do not differ from one alternative course of action to another are irrelevant to the decision.
Review problem 7.5
Match each of the following terms with the appropriate definition in the list given.
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Differential analysis
- Differential revenues and costs
- Avoidable costs
- Sunk costs
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Direct fixed costs
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Allocated fixed costs
- Opportunity costs
A. The benefits forgone when one alternative is selected over another.
B. Fixed costs that can be traced directly to a product line.
C. Revenues and costs that differ from one alternative to another.
D. Costs incurred in the past that cannot be changed by future decisions.
E. Costs that can be avoided by selecting a particular course of action.
F. Fixed costs that cannot be traced directly to a product line.
G. Analyzing the difference in revenues and costs from one alternative course of action to another.
