ACCOUNTING

and COST
CONCEPTS: AN
OVERVIEW
1
MANAGERIAL ACCOUNTING AND FINANCIAL
ACCOUNTING

Managerial accounting provides Financial accounting provides

information for managersof information to stockholders,
organization an who direct creditors and others who are
control its operations. and outside the organization.

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 WORK OF MANAGEMENT

Planning
Directing and
Motivating

Controlling

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PLANNING AND CONTROL CYCLE
Formulating Long- Begin
and
Short-Term Plans
(Planning)

Comparing Actual Implementing

to Decision the Plans
Planned Making (Directing and
Performance Motivating)
(Controlling)

Measuring
Performance
(Controlling)
4
 DIFFERENCES BETWEEN FINANCIAL AND
MANAGERIAL ACCOUNTING
Financial
A c c o u n tin g
External persons w h o
1. U s e r s
m a k e financial decisions
2. T i m e f o c u s Historical perspective
3. Ve r i f i a b i l i t y Emphasis on
versus relevance verifiability
4. P r e c i s i o n v e r s u s
Emphasis on
timeliness
precision
5. S u b j e c t
Pr imary focus is on
the w h o l e organization
6. R e q u i r e m e n t s
Must follow G A A P
a n d prescribed formats
5
Managerial
A c c o u n tin g
M a n a g e r s w h o p l a n for
a n d control a n o r g an iz at i o n
Future em p hasis
Emphasis on relevance
for p l a n n i n g a n d
control
Emphasis on
timeliness
Focuses on segments
of a n organization
N e e d not follow GAAP
or a n y prescribed format
Definitions of Important terms in Cost
Accounting
Costing: Costing is defined as “the technique and process of determining
costs”. It provides the information that management needs to plan and control
the organization’s activities and to make decisions about the future.

Cost Accounting: “Accounting for costs classification and analysis of

expenditure as will enable the total cost of any particular unit of production to be
ascertained with reasonable degree of accuracy

Cost Object: Cost object is anything for which a separate measurement of cost
is required. Cost object may be a product, a service, a project, a customer, a
brand category, an activity, a department or a programme
Definitions of Important terms in Cost
Accounting

Cost Unit: The term cost unit is defined as a unit of quantity of product, service
or time (or a combination of these) in relation to which costs may be ascertained
or expressed. It can be for a job, batch, or product group.

Conversion cost: It is the cost incurred to convert raw materials into finished
goods. It is the sum of direct wages, direct expenses and manufacturing
overheads

Explicit costs: These costs are also known as out-of-pocket costs. They refer to
those costs which involves immediate payment of cash
Definitions of Important terms in Cost
Accounting

Product Costs: Product costs are those which are traceable to the product and
included in inventory values. In a manufacturing concern it comprises the cost of
direct materials, direct labour and manufacturing overheads. Product cost is a full
factory cost.

Period costs: are incurred on the basis of time such as rent, salaries, etc.,
include many selling and administrative costs essential to keep the business
running. Though they are necessary to generate revenue, they are not
associated with production, therefore, they cannot be assigned to a product.
 COMPARING MERCHANDISING AND
MANUFACTURING ACTIVITIES

Merchandisers . . . Manufacturers . . .
• Buy finished goods. • Buy raw materials.
• Sell finished goods. • Produce and sell finished goods.

MegaLoMart

9
 CLASSIFICATIONS OF COSTS

Manufacturing costs are often

classified as follows:

Direct Direct Manufacturing

Material Overhead
Labor

Prime Conversion
Cost Cost

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 MANUFACTURING COSTS

Direct Direct Manufacturing

Materials Overhead
Labor

The Product

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 DIRECT MATERIALS

Those materials that become an integral part of the product and that can be
conveniently traced directly to it.

Example: A radio installed in an

automobile
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 DIRECT LABOR

Those labor costs that can be easily traced to individual units of product.

Example: Wages paid to automobile assembly workers

13
 MANUFACTURING OVERHEAD

Manufacturing costs that cannot be traced directly to specific

units produced.

Examples: Indirect labor and indirect materials

Wages paid to employees Materials used to support

who are not directly the production process.
involved in production
work. Examples: lubricants and
Examples: cleaning supplies used in the
maintenance workers, automobile assembly plant.
janitors and security
guards.
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 NONMANUFACTURING COSTS

• Marketing and selling costs . . .

Costs necessary to get the order and deliver the product.

• Administrative costs . . .
All executive, organizational, and clerical costs.

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QUICK CHECK 

Which of the following costs would be considered manufacturing overhead at

Boeing? (More than one answer may be correct.)
A. Depreciation on factory forklift trucks.
B. Sales commissions.
C. The cost of a flight recorder in a Boeing 767.
D. The wages of a production shift supervisor.

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QUICK CHECK 

Which of the following costs would be considered manufacturing overhead at

Boeing? (More than one answer may be correct.)
A. Depreciation on factory forklift trucks.
B. Sales commissions.
C. The cost of a flight recorder in a Boeing 767.
D. The wages of a production shift supervisor.

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 PRODUCT COSTS VERSUS PERIOD COSTS

Product costs include direct materials, Period costs are not included in
direct labor, and manufacturing product costs. They are expensed on
overhead. the income statement.

Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement

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QUICK CHECK 

Which of the following costs would be considered a period rather than a

product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production facility.

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QUICK CHECK 

Which of the following costs would be considered a period rather than a

product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production facility.

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 BALANCE SHEET

Merchandiser Manufacturer
Current assets Current Assets
• Cash • Cash
• Receivables • Receivables
• Prepaid expenses • Prepaid Expenses
• Merchandise inventory • Inventories
Raw Materials Materials
Partially complete products – waiting to be
some material, labor, or Work in Process processed.
overhead has been added. Finished Goods

Completed products
awaiting sale.
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 THE INCOME STATEMENT
Cost of goods sold for manufacturers differs only slightly from cost
of goods sold for merchandisers.

Merchandising Company Manufacturing Company

Cost of g o o d s sold: Co st of g o o d s sold:
Beg. merchandise B e g . finished
inventory $ 14,200 g o o d s i n v. $ 14,200
+ Purchases 234,150 + Cost of goods
Goods available 234,150
for sale $ 248,350 G o omdasn auvfaa c
i ltaubrlee d
- Ending for sale $248,350
merchandise - Ending
inventory (12,100) finished g o o d s
= Cost of g o o d s inventory (12,100)
sold $ 236,250 = Cost of goods
sold $236,250

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 MANUFACTURING COST FLOWS

Balance Sheet Income

Costs Inventories Statement
Material Purchases Raw Materials
Expenses

Direct Labor Work in

Manufacturing Process
Overhead Finished Cost of
Goods
Goods
Sold
Selling and Period Costs Selling and
Administrative Administrative
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QUICK CHECK 

Which of the following transactions would immediately result in an

expense? (There may be more than one correct answer.)
A. Work in process is completed.
B. Finished goods are sold.
C. Raw materials are placed into production.
D. Administrative salaries are accrued and paid.

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QUICK CHECK 

Which of the following transactions would immediately result in an

expense? (There may be more than one correct answer.)
A. Work in process is completed.
B. Finished goods are sold.
C. Raw materials are placed into production.
D. Administrative salaries are accrued and paid.

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 INVENTORY FLOWS

Beginning
Additions Available
balance + $$$ = $$$$$
$$

_ Withdrawals Ending
Available
$$$$$ $$$ = balance
$$

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QUICK CHECK 

If your bank balance at the beginning of the month was $1,000, you deposited
$100 during the month, and withdrew $300 during the month, what would be
the balance at the end of the month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.

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QUICK CHECK 

If your bank balance at the beginning of the month was $1,000, you deposited
$100 during the month, and withdrew $300 during the month, what would be
the balance at the end of the month?
A. $1,000. $1,000 + $100 = $1,100
$1,100 - $300 = $800
B. $ 800.
C. $1,200.
D. $ 200.

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 PRODUCT COSTS - A CLOSER LOOK

M a n u fa c tu rin g Work
R a w Materials Costs In P r o c e s s

Beginning raw
materials inventory

Beginning inventory is the

inventory carried over from the
prior period.

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 PRODUCT COSTS - A CLOSER LOOK

M a n u fa c tu rin g Work
R a w Materials Costs In P r o c e s s

Beginning raw Direct materials

materials inventory
+ R aw materials
purchased
= R aw materials
a v a i l a b l e for u se
in production
– Ending raw materials As items are removed from raw
inventory materials inventory and placed into
= R a w materials used the production process, they are
in production called direct materials.

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QUICK CHECK 

Beginning raw materials inventory was $32,000. During the month, $276,000
of raw material was purchased. A count at the end of the month revealed
that
$28,000 of raw material was still present. What is the cost of direct material
used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000

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QUICK CHECK 

Beginning raw materials inventory was $32,000. During the month, $276,000
of raw material was purchased. A count at the end of the month revealed
that
used?
$28,000 of raw material was still present. What is the cost of direct material
A. Beg. raw materials $ 32,000
+ Raw materials
$276,000 purchased 276,000
B. = Raw materials available
$272,000
D. $ 2,000 for use in $ 308,000
C. production
– Ending raw materials 28,000
$280,000 inventory
= Raw materials used $ 280,000
in production

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 PRODUCT COSTS - A CLOSER LOOK

M a n u fa c tu rin g Work
R a w Materials Costs In P r o c e s s

Beginning raw D ir e c t m a t e r i a l s
materials inventory + D i r ec t l a b o r
+ Raw materials + M f g. o v e r h e a d
purchased = To t a l m a n u f a c t u r i n g
= Raw materials costs
a v a i l a b l e for use
in production
– Ending raw materials
inventory
= R a w materials used
in production

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 PRODUCT COSTS - A CLOSER LOOK

M a n u fa c tu rin g Work
R a w Materials Costs In P r o c e s s

Beginning raw D ir e c t m a t e r i a l s Conversion

materials inventory + D i r ec t l a b o r costs are costs
+ Raw materials + Mf g. o v e r h e a d incurred to
purchased = To t a l m a n u f a c t u r i n g
convert the
costs
= Raw materials direct material
a v a i l a b l e for use i n into a finished
p r o d u ct i o n product.
– Ending raw materials
= R a wi nmvaetnetroi rayl s u s e d
in production

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QUICK CHECK 

Direct materials used in production totaled $280,000. Direct labor

was
$375,000 and factory overhead was $180,000. What were total manufacturing
costs incurred for the month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.

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QUICK CHECK 

Direct materials used in production totaled $280,000. Direct labor

was
costs incurred
$375,000 for the month?
and factory overhead was $180,000. What were total manufacturing
A. $555,000 Direct Materials $
+ Direct Labor 280,000
B. $835,000
+ Mfg. Overhead 375,000
180,000
C. $655,000 = Mfg. Costs Incurred
D. Cannot be for the Month
determined. $835,000

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 PRODUCT COSTS - A CLOSER LOOK

M a n u fa c tu rin g Work
R a w Materials Costs In P r o c e s s

Beginning raw Direct m at erial s Beginning w or k in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. o v e r h e a d + To t a l m a n u f a c t u r i n g
purchased = To t a l m a n u f a c t u r i n g costs
= Raw materials costs = To t a l w o r k i n
a v a i l a b l e for use p r o c e s s for the
i n p r o d u ct i o n period
– Ending raw
m a t e r i ai nl sv e n t o r y All manufacturing costs incurred
during the period are added to the
= R a w materials used beginning balance of work in
in production
process.
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 PRODUCT COSTS - A CLOSER LOOK

M a n u fa c tu rin g Work
R a w Materials Costs In P r o c e s s

Beginning raw Direct m at erial s Beginning w or k in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. o v e r h e a d + To t a l m a n u f a c t u r i n g
purchased = To t a l m a n u f a c t u r i n g costs
= Raw materials costs = To t a l w o r k i n
a v a i l a b l e for use p r o c e s s for the
i n p r o d u ct i o n period
– Ending w ork in
Costs associated with the goods that process
are completed during the period are inventory
transferred to finished goods = Cost of g o o d s
manufactured.
inventory.
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QUICK CHECK 

Beginning work in process was $125,000. Manufacturing costs incurred for the
month were $835,000. There were $200,000 of partially finished goods
remaining in work in process inventory at the end of the month. What was the
cost of goods manufactured during the month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.

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QUICK CHECK 

Beginning work in process was $125,000. Manufacturing costs incurred for the
month were $835,000. There were $200,000 of partially finished goods
remaining in work in process inventory at the end of the month. What was the
cost of goods manufactured during the month?
A. $1,160,000
B. $ 910,000 Beginning work in
process inventory $
C. $ 760,000 125,000
+ Mfg. costs incurred
D. Cannot be determined. for the period 835,000
= Total work in process
during the period $
– Ending work in 960,000
process inventory
= Cost of goods 200,000
manufactured
$
760,000

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 PRODUCT COSTS - A CLOSER LOOK

Work
In P r o c e s s Finished
Goods

Beginning work in Beginning finished process

inventory goods inventory
+ Manufacturing costs + Cost of g o o d s
for the period
manufactured
= To t a l w o r k i n p r o c e s s = Cost of g oo d s
for the period
available for sale
– Ending w ork in - Ending finished process
inventory goods inventory
= Cost of g o o d s Cost of g o o d s
manufactured sold
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QUICK CHECK 

Beginning finished goods inventory was $130,000. The cost of goods

manufactured for the month was $760,000. And the ending finished goods
inventory was $150,000. What was the cost of goods sold for the month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.

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QUICK CHECK 

Beginning finished goods inventory was $130,000. The cost of goods

manufactured for the month was $760,000. And the ending finished goods
inventory was $150,000. What was the cost of goods sold for the month?
A. $ 20,000. $130,000 + $760,000 = $890,000
$890,000 - $150,000 = $740,000
B. $740,000.
C. $780,000.
D. $760,000.

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COST CLASSIFICATIONS FOR PREDICTING COST
BEHAVIOR

How a cost will react to changes

in the level of business activity.
• Total variable costs
change when activity
• changes.
Total costs remain
fixed when
unchanged activity
changes.

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 TOTAL VARIABLE COST

Your total long distance telephone bill is based on how many minutes you talk.
Total Long Distance
Telephone Bill

Minutes Talked
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 VARIABLE COST PER UNIT

The cost per long distance minute talked is constant. For example, 10 cents
per minute.

Telephone Charge
Per Minute
Minutes Talked
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 TOTAL FIXED COST

Your monthly basic telephone bill probably does not change when you make
more local calls.
Monthly Basic
Telephone Bill

Number of Local Calls

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 FIXED COST PER UNIT

The average cost per local call decreases as more local calls are made.

Monthly Basic Telephone

Bill per Local Call
Number of Local Calls
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COST CLASSIFICATIONS FOR PREDICTING COST
BEHAVIOR

Behavior of Cost (within the relevant range)

Cos In Total Per Unit
t
Variabl Total variable cost changes Variable cost per unit remains
e as activity level changes. the same over wide ranges
of activity.
Fixe Total fixed cost remains Fixed cost per unit goes
d the same even when down as activity level goes
the activity level up.
changes.
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QUICK CHECK 

Which of the following costs would be variable with respect to the number of
cones sold at a Baskins & Robbins shop? (There may be more than one
correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.

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QUICK CHECK 

Which of the following costs would be variable with respect to the number of
cones sold at a Baskins & Robbins shop? (There may be more than one
correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.

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QUICK CHECK 

Which of the following costs would be variable with respect to the number of
people who buy a ticket for a show at a movie theater? (There may be more
than one correct answer.)
A. The cost of renting the film.
B. Royalties on ticket sales.
C. Wage and salary costs of theater employees.
D. The cost of cleaning up after the show.

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QUICK CHECK 

Which of the following costs would be variable with respect to the number of
people who buy a ticket for a show at a movie theater? (There may be more
than one correct answer.)
A. The cost of renting the film.
B. Royalties on ticket sales.
C. Wage and salary costs of theater employees.
D. The cost of cleaning up after the show.

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 DIRECT COSTS AND INDIRECT COSTS

Direct costs Indirect costs

• Costs that can be easily and
conveniently traced to a unit of
product or other cost objective.
• Examples: direct material and direct
labor
• Costs cannot be easily and
conveniently traced to a unit of
product or other cost object.
• Example: manufacturing overhead

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DIFFERENTIAL COSTS AND REVENUES

Costs and revenues that differ among alternatives.

Example: You have a job paying $1,500 per month in your

hometown. You have a job offer in a neighboring city that
pays $2,000 per month. The commuting cost to the city is
$300 per month.
Differential revenue is:
$2,000 – $1,500 = $500

Differential cost is:

$300

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QUICK CHECK 

Suppose you are trying to decide whether to drive or take the train to Portland
to attend a concert. You have ample cash to do either, but you don’t want to
waste money needlessly. Is the cost of the pizza you ate last night relevant in
this decision? In other words, should the cost of the pizza affect the decision of
whether you drive or take the train to Portland?
A. Yes, the cost of the pizza is relevant.
B. No, the cost of the pizza is not relevant.

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QUICK CHECK 

Suppose you are trying to decide whether to drive or take the train to Portland
to attend a concert. You have ample cash to do either, but you don’t want to
waste money needlessly. Is the cost of the pizza you ate last night relevant in
this decision? In other words, should the cost of the pizza affect the decision of
whether you drive or take the train to Portland?
A. Yes, the cost of the pizza is relevant.
B. No, the cost of the pizza is not relevant.

57
QUICK CHECK 

Suppose you are trying to decide whether to drive or take the train to Portland
to attend a concert. You have ample cash to do either, but you don’t want to
waste money needlessly. Is the cost of the train ticket relevant in this decision?
In other words, should the cost of the train ticket affect the decision of whether
you drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.

58
QUICK CHECK 

Suppose you are trying to decide whether to drive or take the train to Portland
to attend a concert. You have ample cash to do either, but you don’t want to
waste money needlessly. Is the cost of the train ticket relevant in this decision?
In other words, should the cost of the train ticket affect the decision of whether
you drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.

59
 NOTE

• Every decision involves a choice from among at least two alternatives.

• Only those costs and benefits that differ between alternatives (i.e.,
Differential costs and benefits) are relevant in a decision. All other costs and
benefits can and should be ignored.

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QUICK CHECK 

Suppose you are trying to decide whether to drive or take the train to Portland
to attend a concert. You have ample cash to do either, but you don’t want to
waste money needlessly. Is the annual cost of licensing your car relevant in this
decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.

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QUICK CHECK 

Suppose you are trying to decide whether to drive or take the train to Portland
to attend a concert. You have ample cash to do either, but you don’t want to
waste money needlessly. Is the annual cost of licensing your car relevant in this
decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.

62
QUICK CHECK 

Suppose you are trying to decide whether to drive or take the train to
Portland to attend a concert. You have ample cash to do either, but you
don’t want to waste money needlessly. Is the depreciation on your car
relevant in this decision?
A. Yes, the depreciation is relevant.
B. No, the depreciation is not relevant.

63
QUICK CHECK 

Suppose you are trying to decide whether to drive or take the train to
Portland to attend a concert. You have amDpeleprceacsihaittoondtohaetither,
but you don’t want to waste money needlessly. Is tsi hae
fduenpcrite
relevant inocthis
niaotdecision?
fiomneli osndyrovi uerncar would be relevant.
A. Yes, the depreciation is relevant.
B. No, the depreciation is not relevant.

Depreciation that is a
function of the passage of
time would not be relevant.

64
 OPPORTUNITY COSTS

The potential benefit that is given up when one alternative is selected over
another.

Example: If you were not attending college,

you could be earning $15,000 per year. Your
opportunity cost of attending college for one
year is $15,000.

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 SUNK COSTS

Sunk costs cannot be changed by any decision. They are not differential costs
and should be ignored when making decisions.

Example: You bought an automobile that cost $10,000 two years ago.
The
$10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you
cannot change the $10,000 cost.

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QUICK CHECK 

Suppose that your car could be sold now for $5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.

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QUICK CHECK 

Suppose that your car could be sold now for $5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.

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