Question

ACC309- UNIT5

1)What is a relevant cost?

2)Prentice Company is considering dropping one of its product lines. What costs of the product line would be relevant to this decision? What costs would be irrelevant?

3)In what way can the use of a ROI as a performance measure for investment centers lead to bad decisions? How does the Residual Income Approach overcome these problems?

4)Why does the Balanced Scorecard include financial performance measures, as well as measures of how internal business processes are doing?

Please answer all of the questions, if you can not answer all of the questions do not reply.

Answer 1

1) A relevant cost is a cost which is different between two alternatives. It changes between alternatives.

2) The costs which will be relevant to the decision would be the variable costs of producing the product and the fixed overheads which can be avoided if the product line was dropped. Sunk costs and fixed overhead which cannot be eliminated are irrelevant.

3) When ROI is used as a performance measure , divisional managers reject investment proposals which are below their division's current ROI even though they might be beneficial to the organization as a whole. The residual income approach helps to mitigate this problem as it uses a dollar value and if the investment yields an operating profit higher than the cost of acquiring capital, then the managers have an incentive to accept the investment.

4) Financial performance measures focus on the financial health of the business i.e. in monetary terms. The internal business aspect focuses on defined processes and quality of operations. Since both are necessary to run a business sucessfully, a balanced scorecard includes both.