Introduction to
Managerial Accounting
and Cost Concepts
Chapter
1
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 2
Managerial Accounting and
Financial Accounting
Managerial accou...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 3
Work of Management
Planning
Controlling
Directing and
Motivating
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 4
Planning and Control Cycle
Formulating Long-and
Short-Term Plan...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 5
Differences Between Financial and
Managerial Accounting
Financi...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 6
MegaLoMart
Comparing Merchandising and
Manufacturing Activities...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 7
The ProductThe Product
Direct
Materials
Direct
Materials
Direct...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 8
Direct Materials
Those materials that become an integral part
o...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 9
Direct Labor
Those labor costs that can be easily traced to
ind...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 10
Manufacturing costs that cannot be traced
directly to specific...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 11
Classifications of Costs
Direct
Material
Direct
Material
Direc...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 12
Nonmanufacturing Costs
Marketing and selling costs . . .
Cost...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 13
Quick Check 
Which of the following costs would be
considered...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 15
Product Costs Versus Period Costs
Product costs include
direct...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 16
Quick Check 
Which of the following costs would be
considered...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 18
Merchandiser
Current assets
Cash
Receivables
Prepaid expens...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 19
Merchandiser
Current assets
Cash
Receivables
Prepaid expens...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 20
The Income Statement
Cost of goods sold for manufacturers diff...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 21
Selling and
Administrative
Period Costs
Manufacturing Cost Flo...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 22
Quick Check 
Which of the following transactions would
immedi...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 24
Inventory Flows
Beginning
balance
$$
Beginning
balance
$$
Addi...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 25
Quick Check 
If your bank balance at the beginning of the
mon...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 27
Manufacturing Work
Raw Materials Costs In Process
Beginning ra...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 28
Manufacturing Work
Raw Materials Costs In Process
Beginning ra...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 29
Quick Check 
Beginning raw materials inventory was $32,000.
D...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 31
Manufacturing Work
Raw Materials Costs In Process
Beginning ra...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 32
Manufacturing Work
Raw Materials Costs In Process
Beginning ra...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 33
Quick Check 
Direct materials used in production totaled
$280...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 35
Manufacturing Work
Raw Materials Costs In Process
Beginning ra...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 36
Manufacturing Work
Raw Materials Costs In Process
Beginning ra...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 37
Quick Check 
Beginning work in process was $125,000.
Manufact...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 39
Product Costs - A Closer Look
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 40
Quick Check 
Beginning finished goods inventory was
$130,000....
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 42
Cost Classifications for Predicting
Cost Behavior
How a cost w...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 43
Total Variable Cost
Your total long distance telephone bill is...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 44
Variable Cost Per Unit
Minutes Talked
PerMinute
TelephoneCharg...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 45
Total Fixed Cost
Your monthly basic telephone bill probably
do...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 46
Fixed Cost Per Unit
Number of Local Calls
MonthlyBasicTelephon...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 47
Cost Classifications for Predicting
Cost Behavior
Behavior of ...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 48
Quick Check 
Which of the following costs would be variable
w...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 50
Quick Check 
Which of the following costs would be variable
w...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 52
Direct Costs and Indirect Costs
Direct costs
 Costs that can ...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 53
Differential Costs and Revenues
Costs and revenues that differ...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 54
Quick Check 
Suppose you are trying to decide whether to
driv...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 56
Quick Check 
Suppose you are trying to decide whether to
driv...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 58
Note
Every decision involves a choice from
among at least two...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 59
Quick Check 
Suppose you are trying to decide whether to
driv...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 61
Quick Check 
Suppose you are trying to decide whether to
driv...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 63
Opportunity Costs
The potential benefit that is
given up when ...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 64
Sunk Costs
Sunk costs cannot be changed by any decision.
They ...
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 65
Quick Check 
Suppose that your car could be sold now for
$5,0...
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Ch01 Material management

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Ch01 Material management

  1. 1. Introduction to Managerial Accounting and Cost Concepts Chapter 1
  2. 2. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 2 Managerial Accounting and Financial Accounting Managerial accounting provides information for managers of an organization who direct and control its operations. Financial accounting provides information to stockholders, creditors and others who are outside the organization.
  3. 3. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 3 Work of Management Planning Controlling Directing and Motivating
  4. 4. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 4 Planning and Control Cycle Formulating Long-and Short-Term Plans (Planning) Measuring Performance (Controlling) Comparing Actual to Planned Performance (Controlling) Implementing the Plans (Directing and Motivating) Begin Decision Making
  5. 5. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 5 Differences Between Financial and Managerial Accounting Financial Managerial Accounting Accounting 1. Users External persons who Managers who plan for make financial decisions and control an organization 2. Time focus Historical perspective Future emphasis 3. Verifiability Emphasis on Emphasis on relevance versus relevance verifiability for planning and control 4. Precision versus Emphasis on Emphasis on timeliness precision timeliness 5. Subject Primary focus is on Focuses on segments the whole organization of an organization 6. Requirements Must follow GAAP Need not follow GAAP and prescribed formats or any prescribed format
  6. 6. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 6 MegaLoMart Comparing Merchandising and Manufacturing Activities Merchandisers . . . Buy finished goods. Sell finished goods. Manufacturers . . . Buy raw materials. Produce and sell finished goods.
  7. 7. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 7 The ProductThe Product Direct Materials Direct Materials Direct Labor Direct Labor Manufacturing Overhead Manufacturing Overhead Manufacturing Costs
  8. 8. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 8 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 automobileExample: A radio installed in an automobile
  9. 9. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 9 Direct Labor Those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workersExample: Wages paid to automobile assembly workers
  10. 10. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 10 Manufacturing costs that cannot be traced directly to specific units produced. Manufacturing Overhead Examples: Indirect labor and indirect materialsExamples: Indirect labor and indirect materials Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors and security guards. Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.
  11. 11. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 11 Classifications of Costs Direct Material Direct Material Direct Labor Direct Labor Manufacturing Overhead Manufacturing Overhead Prime Cost Conversion Cost Manufacturing costs are often classified as follows:
  12. 12. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 12 Nonmanufacturing Costs Marketing and selling costs . . . Costs necessary to get the order and deliver the product. Administrative costs . . . All executive, organizational, and clerical costs.
  13. 13. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 13 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.
  14. 14. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 15 Product Costs Versus Period Costs Product costs include direct materials, direct labor, and manufacturing overhead. Period costs are not included in product costs. They are expensed on the income statement. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement
  15. 15. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 16 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.
  16. 16. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 18 Merchandiser Current assets Cash Receivables Prepaid expenses Merchandise inventory Manufacturer Current Assets Cash Receivables Prepaid Expenses Inventories Raw Materials Work in Process Finished Goods Balance Sheet
  17. 17. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 19 Merchandiser Current assets Cash Receivables Prepaid expenses Merchandise inventory Manufacturer Current Assets Cash Receivables Prepaid Expenses Inventories Raw Materials Work in Process Finished Goods Balance Sheet Partially complete products – some material, labor, or overhead has been added. Completed products awaiting sale. Materials waiting to be processed.
  18. 18. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 20 The Income Statement Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. Merchandising Company Cost of goods sold: Beg. merchandise inventory 14,200$ + Purchases 234,150 Goods available for sale 248,350$ - Ending merchandise inventory (12,100) = Cost of goods sold 236,250$
  19. 19. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 21 Selling and Administrative Period Costs Manufacturing Cost Flows Finished Goods Cost of Goods Sold Selling and Administrative Manufacturing Overhead Work in Process Direct Labor Balance Sheet Costs Inventories Income Statement Expenses Material Purchases Raw Materials
  20. 20. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 22 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.
  21. 21. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 24 Inventory Flows Beginning balance $$ Beginning balance $$ Additions $$$ Additions $$$+ Available $$$$$ Available $$$$$= Ending balance $$ Ending balance $$ =Withdrawals $$$ Withdrawals $$$ _Available $$$$$ Available $$$$$
  22. 22. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 25 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.
  23. 23. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 27 Manufacturing Work Raw Materials Costs In Process Beginning raw materials inventory Product Costs - A Closer Look Beginning inventory is the inventory carried over from the prior period. Beginning inventory is the inventory carried over from the prior period.
  24. 24. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 28 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials materials inventory + Raw materials purchased = Raw materials available for use in production – Ending raw materials inventory = Raw materials used in production As items are removed from raw materials inventory and placed into the production process, they are called direct materials. As items are removed from raw materials inventory and placed into the production process, they are called direct materials. Product Costs - A Closer Look
  25. 25. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 29 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
  26. 26. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 31 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials materials inventory + Direct labor + Raw materials + Mfg. overhead purchased = Total manufacturing = Raw materials costs available for use in production – Ending raw materials inventory = Raw materials used in production Product Costs - A Closer Look
  27. 27. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 32 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials materials inventory + Direct labor + Raw materials + Mfg. overhead purchased = Total manufacturing = Raw materials costs available for use in production – Ending raw materials inventory = Raw materials used in production Conversion costs are costs incurred to convert the direct material into a finished product. Conversion costs are costs incurred to convert the direct material into a finished product. Product Costs - A Closer Look
  28. 28. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 33 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.
  29. 29. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 35 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory + Raw materials + Mfg. overhead + Total manufacturing purchased = Total manufacturing costs = Raw materials costs = Total work in available for use process for the in production period – Ending raw materials inventory = Raw materials used in production Product Costs - A Closer Look All manufacturing costs incurred during the period are added to the beginning balance of work in process. All manufacturing costs incurred during the period are added to the beginning balance of work in process.
  30. 30. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 36 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory + Raw materials + Mfg. overhead + Total manufacturing purchased = Total manufacturing costs = Raw materials costs = Total work in available for use process for the in production period – Ending work in process inventory = Cost of goods manufactured. Product Costs - A Closer Look Costs associated with the goods that are completed during the period are transferred to finished goods inventory. Costs associated with the goods that are completed during the period are transferred to finished goods inventory.
  31. 31. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 37 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.
  32. 32. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 39 Product Costs - A Closer Look
  33. 33. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 40 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.
  34. 34. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 42 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 fixed costs remain unchanged when activity changes. How a cost will react to changes in the level of business activity. Total variable costs change when activity changes. Total fixed costs remain unchanged when activity changes.
  35. 35. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 43 Total Variable Cost Your total long distance telephone bill is based on how many minutes you talk. Minutes Talked TotalLongDistance TelephoneBill
  36. 36. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 44 Variable Cost Per Unit Minutes Talked PerMinute TelephoneCharge The cost per long distance minute talked is constant. For example, 10 cents per minute.
  37. 37. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 45 Total Fixed Cost Your monthly basic telephone bill probably does not change when you make more local calls. Number of Local Calls MonthlyBasic TelephoneBill
  38. 38. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 46 Fixed Cost Per Unit Number of Local Calls MonthlyBasicTelephone BillperLocalCall The average cost per local call decreases as more local calls are made.
  39. 39. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 47 Cost Classifications for Predicting Cost Behavior Behavior of Cost (within the relevant range) Cost In Total Per Unit Variable Total variable cost changes Variable cost per unit remains as activity level changes. the same over wide ranges of activity. Fixed Total fixed cost remains Fixed cost per unit goes the same even when the down as activity level goes up. activity level changes.
  40. 40. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 48 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.
  41. 41. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 50 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.
  42. 42. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 52 Direct Costs and Indirect Costs Direct costs  Costs that can be easily and conveniently traced to a unit of product or other cost objective.  Examples: direct material and direct labor Indirect costs  Costs cannot be easily and conveniently traced to a unit of product or other cost object.  Example: manufacturing overhead
  43. 43. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 53 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. 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
  44. 44. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 54 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.
  45. 45. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 56 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.
  46. 46. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 58 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.
  47. 47. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 59 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.
  48. 48. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 61 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.
  49. 49. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 63 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.
  50. 50. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 64 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.
  51. 51. © The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 65 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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