6 Relevant costing

Question 1

What cash flows are included in relevant costing?

Answer 1

Future and Incremental cash flows.

Question 2

What does a future cash flow mean?

Answer 2

Only future cash flows that occur as a result of the decision should be considered

Question 3

What does Incremental cash flow mean?

Answer 3

Only extra cash flows that occur as a result of the decision should be considered

Question 4

What does opportunity cost mean?

Answer 4

The value of the best alternative when a particular course of action is undertaken

Question 5

What happens if you have to deny a supply of material to another part of the organisation?

Answer 5

You have to calculate the relevant cost which is = normal material cost + lost contribution

Question 6

What is a relevant cash flow for fixed assets?

Answer 6

If you are going to use a machine that was originally going to be sold, there is a opportunity cost which equals the proceeds missed.

Question 7

What are the non relevant cash flows?

Answer 7

• Depreciation
• Profit or loss on an asset
• Original purchase price (this is a sunk cost)
• NBV of machinery

Question 8

What are the two make vs buy decisions?

Answer 8

• with no limiting factors

- with limiting factors

Question 9

What are relevant costs when the make vs buy decision is with no limiting factors?

Answer 9

It is the differential costs between the two options.

Question 10

How do you work out a make vs buy decision with a limiting factor?

Answer 10

1. Work out contribution
2. Then work out contribution per unit
3. Rank the products from the highest saving per unit of the limiting factor
4. Decide which products should be given the scarce resource

Question 11

What are other make vs buy decisions that should be considered?

Answer 11

• Customer reaction to the product
• reliability of the external supplier
• specialist skills a supplier might have
• alternative resourcing - outsourcing will free up material
• social - will outsourcing reduce the need for a workforce
• legal - will outsourcing affect other contractual obligations
• confidentiality- risk of losing this as sharing information with a supplier

Question 12

What is a shut down decision?

Answer 12

To decide whether part of a business should shut down if it becoming unprofitable

Question 13

What cash flows should be considered in a shut down decision?

Answer 13

• lost contribution of area being closed
• savings in specific fixed costs from closure
• know penalties - redundancy
• reorganisation costs
• additional contribution from alternative use of the resource released

Question 14

What should be considered when looking at one off contracts?

Answer 14

• contract price needs to cover cash flows

- any price higher than the minimum will mean the company should take the deal