MAS-04: RELEVANT COSTING Decision Making – is the process of choosing at least two alternatives.

For
business entities, management must choose in favor of the option that is most beneficial to the
company in order to achieve the corporate objective of maximizing profit. SHORT-TERM DECISION
ALTERNATIVES 1. Make or Buy a part or a product line 2. Accept of reject a special order 3. Sell or
process further a product line 4. Continue or shutdown a business segment TYPICAL DECISION-MAKING
PROCESS 1. Defining the problem. 2. Specifying the objective and criteria. 3. Identifying the alternative
courses of action. 4. Evaluating the possible consequences of action. 5. Collecting the data needed to
make decision. 6. Choosing the best alternative and making the decision. 7. Evaluating the results of the
decision. FACTORS CONSIDERED IN DECISION-MAKING Qualitative factors – Factors that cannot be
expressed effectively in numerical terms. Quantitative Factors – Factors that can be expressed in terms
of money or other numerical units. TYPES OF COSTS AND TERMINOLOGIES USED IN SHORT-TERM
DECISION-MAKING RELEVANT COSTS – Future costs that are expected to different among alternatives;
considered as the avoidable costs of a particular decision. DIFFERENTIAL COSTS – Increases (increments)
or decreases (decrements) in total costs that result from selecting one alternative instead of another.
[Relevant] AVOIDABLE COSTS – Costs that will be saved or those that will not be incurred if a certain
decision is made. [Relevant] OPPORTUNITY COSTS – Income sacrificed, or benefit foregone when a
certain alternative is chosen over another alternative. [Relevant] SUNK COSTS – Costs that are incurred
already and cannot be avoided, regardless of what decision is made. [Irrelevant] SHUTDOWN COSTS –
Usual costs that a company will continue even if it decides to discontinue or shutdown the operation of
a company segment. [Irrelevant] OUT-OF-POCKET COSTS – Costs that will require expenditure of cash or
incurrence of a liability as a consequence of a management decision. [Usually Relevant]