W2D1

Accounting data is very helpful in the decision-making process. For example, if you were to buy a car you would need to know all the costs associated which includes the costs of your current car, the costs of the new car, and the funds available to cover those costs. The same is true in accounting. All sorts of data is available to help managers make decisions. They can also break that data down into various categories to make it even more useful. To help you begin to understand the kinds of data that accountants can provide, answer these questions:

1 – What is the difference between an opportunity cost and a sunk cost? Share an example of each with the group.

2 – Define variable, fixed, and mixed costs. Share an example of each with the group.

3 – What is the formula for the contribution margin ratio? How is it useful in the decision-making process?

Write at least 300 words

Post at least two replies to either peers or the instructor

Write at least 150 words per reply

Deborah Banks

Sunk Costs are costs that companies should ignore when making current decisions.  They are costs that have been incurred and no decision will change the outcome of this cost. The maker of t-shirts will spend $100 for the cast to print 500 t-shirts.  The cost of the cast is considered a sunk cost.  This cost can’t be changed.   An opportunity cost has a potential benefit based on the selection of one decision over another.    A bank offers $50 to open a new account and a competitor does not offer an incentive.  The $50 is the opportunity cost that would be lost if the individual does not open an account at this bank.

Fixed costs are just that.  They are fixed and do not change and are not affected by changes in activity.  Examples of fixed cost include rent, insurance, and taxes.  Rent remains the same, regardless of other changes a company can make.  Variable costs change as activity levels change.  When a company increases output, more employees are needed.  This increase in labor costs is considered a variable cost because the cost is based on the activity level of the employee.  Mixed costs have elements of fixed and variable costs.  A salary of $50,000 with an incentive of $500 per sale would represent mixed costs.  The salary is a fixed cost and the incentive pay is a variable cost.  The incentive pay depends on the individual’s activity level.

The total contribution margin is the total sales – variable expenses/total sales.  (Noreen, 2017). The contribution margin ratio is the total contribution margin/total sales.  This is important in sales, as it informs the company of the cost of variable expenses in relation to the total sales.

References:

Noreen, E. (2017). Managerial Accounting for Managers (4th Edition). Mcgraw-Hill Education

John Pfeffer

Opportunity cost is when someone picks the an opportunity and gives up on the potential benefit of the other opportunity. An example of an opportunity cost is if you go and spend money on a concert that you wanted to see instead of going to a movie that you wanted to see. You will never be able to get that opportunity back for the time you spent at the concert. Sunk costs are costs that have already occurred and can never be changed for any reason (Noreen, Brewer, & Garrison, 2016). An example of Sunk costs is when you pay your rent. That cost is gone and cannot ever be brought back. These are different in the fact that you have a choice with your opportunity costs but with sunk costs there really is no choice and it is all a set cost.

Variable cost is a cost that changes depending on the change that is happening at the time with the activity it is tied (Noreen, Brewer, & Garrison, 2016). An example of variable cost is any raw material that may be used to produce a product in a business. For example, you need cotton to make shirts or rubber to make pencil erasers. The cost is dependent on how many materials you actually need or make. Fixed costs are costs that remain constant no matter what happens (Noreen, Brewer, & Garrison, 2016). An example of a fixed cost is insurance each month. You know you have to pay it and it is at a fixed rate. Mixed costs are costs that contain both variable and fixed costs (Noreen, Brewer, & Garrison, 2016). An example of mixed cost is when you buy something that you have a fixed payment on, like a boat, but you still have to pay for gas for the boat. The gas is dependent on how much you use the boat.

The formula for the contribution margin ratio is:

CM ratio = Contribution Margin/Sales

This is useful in the decision making process because it can help compute the cost-volume-profit calculations, which can be helpful when you are trying to decide if something is worth changing (Noreen, Brewer, & Garrison, 2016).

Noreen, E., Brewer, P., & Garrison, R. (2016). Managerial accounting for manager. (4th ed.). McGraw-Hill/Irwin. eBook ISBN: VS9781259730061R180