By James L. Gibson, W. Warren Haynes
Accounting in Small company Decisions provides the 1st large-scale empirical exam of ways small companies use accounting facts to make working judgements.
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54. We discount the $100 by dividing it by (l+r)"' (where r is the interest rate and n the number of years) to determine its present value. In this case the failure to discount means that we overvalue future do11ars by almost three times as compared with present dollars. 4. The Opportunity Cost Principle: decision making requires a careful measurement of opportunity costs, that is, of the sacrifices required by a decision. The discounting principle is closely related to a broader concept, of which it is actually a particular application-the concept of opportunity costs.
The focus on past data is appropriate if there is a close relationship between past and future volume. Accounting systems can provide information on past sales and sales returns of individual or related merchandise. Other internal sources of information include customer and sales people suggestions. External sources of information for anticipating demand include buying office circulars, trade papers, newspapers, and market surveys. 2 Accounting systems as sources of historical data The accounting systems are rarely designed to develop relevant data explicitly for internal decision making.
The cost of selecting any alternative in making a decision consists of the sacrifice of other alternatives required by that decision. One of the costs of taking a vacation trip, for example, is the sacrifice of the gardening one might have accomplished. Since a cost is a cost only if a sacrifice is involved, we can state dogmatically that all costs relevant to decision making are opportunity costs. The incremental costs discussed earlier in this chapter are opportunity costs. The reason that fixed or sunk costs 17 are irrelevant to some decisions is that the decision will not affect them-no sacrifice is required.