ACCT 102 Management Accounting Lecture 12

1. ACCT 102Management AccountingLecture 12

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4. 4 Identifying Relevant Costs

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20. 20 Sunk costs may cause ethical dilemmas Although the book value of an old item has no economic significance (i.e. not relevant), the accounting treatment of past costs may make it difficult for managers to regard them as irrelevant. The possibility of recording an accounting loss may place managers in an ethical dilemma. Fearing the loss will lead to superiors questioning his or her judgment, a manager might prefer to use the old item, as opposed to replacing it and be forced to record a loss. Cumulative effect of many such decisions will be harmful to the long-run economic health of the organization

21. 21 Disposal and Salvage Values Cash inflows from the disposal of assets is a relevant cash inflow Any salvage value at the end of the useful life of the assets will also be relevant A loss on disposal may have a favorable tax impact if the loss can be offset against taxable gains or taxable income

22. 22 Analyst must know what to look out for, and this knowledge will help guide the search for the few pieces of relevant information contained in voluminous set of data Predicting relevant costs may involve an examination of past cost trends It is more difficult to predict costs when technology changes

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24. 24 Under relevance costing, only costs and revenues that differ under each alternative should be considered

25. 25 Predicting relevant costs may involve an examination of past cost trends It is more difficulty to predict costs when technology changes Apart relevant costs and revenues, other quantitative factors such as long-run profit should be considered Qualitative factors such as legal, ethical and social implications of decisions must also be recognized