Book value of old equipment is not a relevant cost in a decision

Test bank chapter relevant costing chapter relevant. Similarly, the book value of rs 10,000 which has to be written off whatever alternative future action is chosen, is also not relevant because it. Relevant cost describes avoidable costs that are incurred to implement decisions. The equipment replacement decision the parts replacement decision, to replace a piece of equipment should be based on facts and figures. Book value is the measure of all of a companys assets. Those cost savings and other possible cost savings will be considered along with the loss of sales revenues. One of the dangers of allocating common fixed costs to a product line is that such allocations can make. Explain why each of the following is or is not relevant to the replacement decision. The book value of an asset historical cost accumulated depreciation is a sunk. Determine relevant items of cash outflows and inflows due to the decision.

Incremental analysis is not an optimization technique. This video focuses on equipment replacement decisions without the. In theory, book value should include everything down to the pencils and. Relevant costs include all additional costs of making or all costs avoided by buying. However, any tradein allowance or cash disposal value of the old asset is relevant lo 6. Identify relevant information for decisionmaking principles of. Which of the following items are relevant to the decision to replace equipment. In carrying out step three of the managerial decisionmaking process.

So, if an old product is discontinued three years early to make room for a new product, the revenue and cost decreases relating to. Relevant costs for decision making chapter 11 relevant. Future costs that do not differ between the alternatives in a decision are. The book value of old equipment is a relevant cost in a decision to replace that. Jun 25, 2019 book value is the measure of all of a companys assets. For example, a company truck carrying some goods from city a to city b, is loaded with one more ton of goods.

Managerial accounting equipment replacement youtube. The judgment which the ownermanager of a small company makes should be the result of weighing the costs of keeping the old equipment against the cost of its replacement. The book value of a machine is a sunk cost that does not affect a decision involving its replacement. F medium only the variable costs identified with a product are relevant in a decision concerning whether to eliminate the product. Production decisions opportunity costs opportunity cost the maximum available contribution to profit foregone by using limited resources for a particular purpose not a cost in the normal sense of the word consider the choice between staying with your current job or returning to school. Relevant costs can be defined as any cost relevant to a decision. Book value of old equipment is considered to be a a. Incremental analysis and decisionmaking costs micro business. Sales proceeds of old equipment is relevant for the decision and be considered for this analysis. A book value of old equipment is not a relevant cost in a decision tf. Book value is an accounting item and is subject to adjustments e. The relevant cost is the cost of loading and unloading the additional cargo, and not. The book value of the old machine does not affect the decision it is a sunk cost. The new machine is more efficient than the old machine, but it has a.

The purchase of the new plant results in a saving of rs 14,000 rs 90,000. The relevant cost is what the asset or input is actually worth today, not, for example, what it cost to acquire. Relevant cost explanation examples concept applications. The cost is treated as a fiveyear annuity, discounted at 0.

Concept of equipment replacement decision accounting. Nov 23, 2011 decision making and relevant information. Which of the following is relevant information in a decision whether old equipment presently being used should be replaced by new equipment. Opportunity cost is a cost that cannot be changed by any present or future decision. Feb 22, 2011 3 answers to a company is considering replacing old equipment with new equipment. In a decision to retain or replace old equipment, the book value of the old equipment is relevant in incremental analysis. Buying new equipment versus remodeling old equipment.

Chapter 12 managerial accounting tf flashcards quizlet. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Any future cost that does not differ between the alternatives is not a relevant cost for the decision. Which of the following is not considered in the incremental analysis.

Rs 1, 00,000 has already been incurred and being a sunk cost is not relevant to the decision, i. Similarly, the book value of rs 10,000 which has to be written off whatever alternative future action is chosen, is also not relevant because it cannot be changed by any future decision. Annual operating cost of the new equipment annual operating cost of the old equipment net cost of the new equipment book value of the old equipment instructor. Difference between relevant cost and irrelevant cost. T easy the book value of old equipment is not a relevant cost in an equipment replacement decision problem. Relevant costs of the makeorbuy decision are those costs that will change in the future as a result of the decision. This video is for students that are taking an introduction to managerial accounting course. It appears that the proposed plant would result into cost savings of rs 24,000 1,00,000 76,000. The book value of old equipment is a relevant cost in a decision to replace that equipment false an avoidable cost is a cost that can be completely eliminated irrespective of whether one chooses one alternative or another in a decision.

Depreciation and book values notional costs are not relevant. An explanation of the relevant costs for decision making purposes. Costs influencing decisionmaking and planning 9 types. However, the book value of the present equipment is a sunk cost and not relevant in the decision.

All future costs are relevant in decision making tf. Book value of old equipment disposal value of old equipment gain or loss on disposal cost of new equipment powerpoint templates page 17 18. It is irrelevant to proposal 2 because book value is irrelevant in equipment replacement decisions. Book value or written down value is irrelevant for the decisions loss on sale of old machinery is irrelevant for this decision. Which costs are usually relevant in a makeorbuy decision. The book value of old equipment is a relevant cost in a decision to replace that equipment. In the decision to retain or replace equipment, the book value of the old equipment is a sunk cost. Chapter 11 relevant costs for decision making answer key true false questions 1. On the other hand, the officers salaries are not relevant in the decision.

Book value of old equipment for manufacturing part b. This cost would not be relevant because it is the same under either alternative. Fitzgerald must identify all relevant costs and chose a decision for the best interest of shamrock datar, rajan, 20. False a pharmaceutical company that sells patented drugs will most likely be. Identify the relevant costs to be considered in retaining or replacing equipment. Mar 19, 2020 book value is an accounting item and is subject to adjustments e. The cash disposal value of old equipment is considered to be a. Which of the following is a relevant cost for incremental analysis. The relevant cost is the cost of loading and unloading the additional cargo, and not the cost of the fuel, driver salary, etc. Which of the following is not relevant in deciding whether to retain or replace equipment. Acctg 311a old sample final exam answers and solutions. The book value of old equipment is not a relevant cost in a. The book value of old equipment is not a relevant cost in. The book value of old equipment is not a relevant cost in a decision.

Tco 9 a company is deciding whether or not to replace some old equipment with new equipment. Any costs which would be incurred whether or not the decision is made are not. In a decision to retain or replace old equipment, the salvage value of the old equipment is relevant in incremental analysis. In a decision to retain or replace equipment, the book value of the old equipment is a an.

A cost that is relevant in one decision may not be relevant in another decision. The following analysis helps in making a better use of the data. It relevant since it increase the cost of the new equipment it is not relevant since it reduces the cost of the old equipment it is not relevant to the decision since it does not impact the cost of the new equipment. In a decision to retain or replace equipment, the book value of the old equipment is aan. Study 60 terms accounting test 4 flashcards quizlet. Concept of equipment replacement decision accountingmanagement. Sunk costs are not relevant in incremental analysis.

If the company has been depreciating its assets, one may need to. Before making the decision, we must consider the relevance of four commonly encountered items. Incremental analysis is a decisionmaking tool in which the relevant costs and revenues of. The costs which should be used for decision making are often referred to as relevant costs. When deciding whether or not to replace old equipment with new equipment, the overriding consideration is the. It relevant since it increase the cost of the new equipment it is not relevant since it reduces the cost of the old equipment it is not relevant to the decision since it. Which of the following is considered a relevant cost. A company decided to replace an old machine with a new machine. One of the dangers of allocating common fixed costs to a product line is. Similarly, the book value of existing equipment is irrelevant, but the disposal. The salvage value of the old equipment a company is deciding whether or not to replace some old equipment with new equipment. When a company has a production constraint, total contribution margin will be maximized by emphasizing the products with the lowest contribution margin per unit of the constrained resource. The book value of old equipment is a relevant cost.

The judgment which the ownermanager of a small company makes should be the result of weighing the costs of keeping the. Book value of old equipment is considered to be a a relevant. In this context, an opportunity cost refers to the value of an asset or other input that will be used in a project. This is because the book value reflects the original cost less accumulated depreciation and neither of these values is relevant to the decision.

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