Cost Accounting (14th Edition)

394 CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION
Exhibit 11-3
Key Features of Relevant Information
■
■
■
■
Past (historical) costs may be helpful as a basis for making predictions. However, past costs
themselves are always irrelevant when making decisions.
Different alternatives can be compared by examining differences in expected total future revenues
and expected total future costs.
Not all expected future revenues and expected future costs are relevant. Expected future
revenues and expected future costs that do not differ among alternatives are irrelevant and, hence,
can be eliminated from the analysis. The key question is always, “What difference will an action make?”
Appropriate weight must be given to qualitative factors and quantitative nonfinancial factors.
can clear away the clutter of potentially confusing irrelevant data. Focusing on the relevant
data is especially helpful when all the information needed to prepare a detailed income statement
is unavailable. Understanding which costs are relevant and which are irrelevant helps
the decision maker concentrate on obtaining only the pertinent data and is more efficient.
Qualitative and Quantitative Relevant Information
Managers divide the outcomes of decisions into two broad categories: quantitative and
qualitative. Quantitative factors are outcomes that are measured in numerical terms.
Some quantitative factors are financial; they can be expressed in monetary terms.
Examples include the cost of direct materials, direct manufacturing labor, and marketing.
Other quantitative factors are nonfinancial; they can be measured numerically, but
they are not expressed in monetary terms. Reduction in new product-development time
and the percentage of on-time flight arrivals are examples of quantitative nonfinancial
factors. Qualitative factors are outcomes that are difficult to measure accurately in
numerical terms. Employee morale is an example.
Relevant-cost analysis generally emphasizes quantitative factors that can be expressed
in financial terms. But just because qualitative factors and quantitative nonfinancial factors
cannot be measured easily in financial terms does not make them unimportant. In fact,
managers must wisely weigh these factors. In the Precision Sporting Goods example, managers
carefully considered the negative effect on employee morale of laying-off materialshandling
workers, a qualitative factor, before choosing the reorganize alternative.
Comparing and trading off nonfinancial and financial considerations is seldom easy.
Exhibit 11-3 summarizes the key features of relevant information.
An Illustration of Relevance: Choosing Output
Levels
The concept of relevance applies to all decision situations. In this and the following several
sections of this chapter, we present some of these decision situations. Later chapters
describe other decision situations that require application of the relevance concept, such as
Chapter 12 on pricing, Chapter 16 on joint costs, Chapter 19 on quality and timeliness,
Chapter 20 on inventory management and supplier evaluation, Chapter 21 on capital
investment, and Chapter 22 on transfer pricing. We start by considering decisions that
affect output levels such as whether to introduce a new product or to try to sell more units
of an existing product.
One-Time-Only Special Orders
One type of decision that affects output levels is accepting or rejecting special orders
when there is idle production capacity and the special orders have no long-run implications.
We use the term one-time-only special order to describe these conditions.
Example 1: Surf Gear manufactures quality beach towels at its highly automated
Burlington, North Carolina, plant. The plant has a production capacity