CHAPTER 11
DECISION MAKING AND RELEVANT INFORMATION
11-1Outline the five-step sequence in a decision process.
The five steps in the decision process outlined in Exhibit 11-1 of the text are
1.Identify the problem and uncertainties.
2.Obtain information.
3.Make predictions about the future.
4.Make decisions by choosing among alternatives.
5.Implement the decision, evaluate performance, and learn.
11-2Define relevant costs. Why are historical costs irrelevant?
Relevant costs are expected future costs that differ among the alternative courses of action being
considered. Historical costs are irrelevant because they are past costs and, therefore, cannot differ
among alternative future courses of action.
11-3“All future costs are relevant.” Do you agree? Why?
No. Relevant costs are defined as those expected future costs that differ among alternative
courses of action being considered. Thus, future costs that do not differ among the alternatives
are irrelevant to deciding which alternative to choose.
11-4Distinguish between quantitative and qualitative factors in decision making.
Quantitative factors are outcomes that are measured in numerical terms. Some quantitative
factors are financial––that is, they can be easily expressed in monetary terms. Direct materials
are an example of a quantitative financial factor. Other quantitative nonfinancial factors, such as
on-time flight arrivals, cannot be easily expressed in monetary terms. Qualitative factors are
outcomes that are difficult to measure accurately in numerical terms. An example is employee
morale.
11-5Describe two potential problems that should be avoided in relevant-cost analysis.
Two potential problems that should be avoided in relevant cost analysis are
(i) Do not assume all variable costs are relevant and all fixed costs are irrelevant.
(ii) Do not use unit-cost data directly. It can mislead decision makers because
a.it may include irrelevant costs, and
b.comparisons of unit costs computed at different output levels lead to erroneous
conclusions.
11-6 “Variable costs are always relevant, and fixed costs are always irrelevant.” Do you
agree? Why?
No. Some variable costs may not differ among the alternatives under consideration and, hence,
will be irrelevant. Some fixed costs may differ among the alternatives and, hence, will be
relevant.
11-7“A component part should be purchased whenever the purchase price is less than its total
manufacturing cost per unit.” Do you agree? Why?
11-1