4. Relevant Costs and Decision Making

Question 1

What are relevant costs?

Answer 1

Costs appropriate to a specific management decisions

Question 2

What are the three criteria that a relevant cost must meet?

Answer 2

1. Future (not sunk)
2. Incremental (not already committed)
3. Cash flow

Question 3

What is the relevant cost of a material if it is not currently in stock?

Answer 3

Current purchase price

Question 4

What is the relevant cost of a material if it is currently in stock, and not used elsewhere in the business?

Answer 4

Lost resale/scrap value (minus benefit of disposal costs not spent)

Question 5

What is the relevant cost of a material if it is currently in stock and used elsewhere in the business, but can be replaced?

Answer 5

Current purchase price

Question 6

What is the relevant cost of a material if it is currently in stock and used elsewhere in the business, and cannot be replaced?

Answer 6

Opportunity cost -> lost contribution + VC of material

Question 7

What is the relevant cost of labour if it is not at full capacity?

Answer 7

Zero

Question 8

What is the relevant cost of labour if it is at full capacity, but more staff can be hired/overtime worked?

Answer 8

The lower of overtime and hiring more staff

Question 9

What is the relevant cost of labour if it is at full capacity, and more staff cannot be hired/overtime worked?

Answer 9

Opportunity cost -> lost contribution + VC of labour

Question 10

What is the relevant cost of a non current asset?

Answer 10

The DEPRIVAL value:

The lower of replacement cost and (the higher of economic value in the business and NRV)