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Accounting - Term Papers

Accounting

CHAPTER 14
Decision Making: Relevant Costs and Benefits


ANSWERS TO REVIEW QUESTIONS

1. The six steps in the decision-making process are as follows:

. Clarify the decision

. Specify the criterion

. Identify the alternatives

. Develop a decision model

. Collect the data

. Select an alternative

2. The managerial accountant's role in the decision-making process is to participate as a proactive member of the management team, and, in particular, to provide information relevant to the decision.

3. A decision model is a simplified representation of the choice problem. Unnecessary details are stripped away, and the most important elements of the ...

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characteristics that might favor the second-best alternative. Suppose, for example, that a hospital's board of directors is considering establishing an outpatient clinic in one of the two suburban communities. The quantitative analysis of the decision suggests that site A will be more cost effective for the clinic than site B. Assume that the annual cost of running the clinic at site A will be $50,000 less than the annual cost of running the clinic at site B. Now suppose that the board of directors feels that various qualitative considerations indicate that it would be preferable to locate the clinic at site B. For example, suburb B might be an economically depressed area, where it is important to bring better-quality health care to the community. Now the board of directors can put a price on these qualitative advantages to locating the clinic at site B. If the board of directors believes that the qualitative benefits at site B outweigh the $50,000 quantitative advantage at site A, ...

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on the future.

9. The book value of inventory, like the book value of any asset, is not a relevant cost. The inventory's book value is based on its acquisition cost or its production cost and is, therefore, a sunk cost. It has no bearing on any future course of action.

10. Managers sometimes exhibit a behavioral tendency to inappropriately consider a sunk cost in making a decision, because they believe that their original decision to incur the sunk cost, such as when an asset is acquired, will appear to have been a bad decision if the manager subsequently disposes of the asset. This perceived need by managers for their past decisions to appear to have been good ones may ...

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PAPER DETAILS
Added: 11/3/2013 09:32:06 PM
Submitted By: jiya
Category: Economics
Type: Premium Paper
Words: 5374
Pages: 20

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