Chapter 10 - Relevant costs and decision making Flashcards
What are relevant costs and revenues?
Costs and revenues that change as a direct result of a decision taken
What features do relevant costs and revenues have?
- Future costs and revenue
- Incremental/differential
- Cash flows
What categories do non-relevant costs fall into?
- Sunk costs
- Committed costs
- FC
- Depreciation
- Notional costs
What is incremental revenue?
Differences in revenue between alternatives
What will matching incremental costs and revenues do?
Produce a figure for the incremental gain/loss between the alternatives
How are relevant costs of materials determined?
- Are materials already in inv? (Y continue, no = cost of pruchase)
- Will they be replaced? (No continue, Y = Replacement cost
- Will it be used elsewhere? (Y = Opportunity cost, No = NRV
How is the relevant cost of labour determined?
Is there spare capacity:
- If yes, relevant cost = 0
- If no, lower of Cost to hire labour and contribution foregone + direct labour costs
How is the relevant cost of overheads determined?
Only those overheads that vary as a direct result of a decision taken are relevant overheads
How is the relevant cost of NCAs determined?
- Will asset be replaced (Y = replacement cost, No continue)
- Will asset be sold (Y = NRV, No = net flows from use of asset)
What is the rule when there is a single limiting factor?
Maximise contribution per unit of scarce resource
What are the steps of limiting factor analysis?
- Identify limiting factor
- Calc contribution per unit for each product
- Calc contribution per unit of limiting factor for each product
- Rank products in order of contribution
- Allocate resources using ranking
How should products be ranked in the make vs buy scenario?
Based on saving made per usage of the scarce resource
What are the steps to answering the make vs buy question?
- Calc saving per unit of each product (saving = purchase price - VC)
- Divide this by amount of scarce resource each product uses
- Rank, higher the saving, greater priority should be given
- Resources applied in rank order
- Any left buy externally
What non-financial issues should be considered when answering the make vs buy question?
- Reliability of external supplier
- Specialist skills
- Alternative use of resource
- Impact on staff
- Customer reaction
What is the focus of discontinuation decisions?
Whether costs and revenues are avoidable
What do businesses need to determine when considering discontinuation?
Difference between forgone revenue from the closure and the incremental cost savings from closure
What are some of the quantifiable costs/benefits of discontinuation?
- Lost contribution from the area being closed (c)
- Savings in specific FC (b)
- Pens and other costs (c)
- Reorganisation costs (c)
- Additional contribution (b)
What are some of the non financial factors that need considering if discontinuing?
- Impact on staff
- Customer reaction
- Wider community
- Company rep
What costing principles should be considered when deciding to accept a one off proposal?
- Accept if selling price of contract > relevant costs
- Selling price unknown, min price set at incremental costs of manufacturing + opportunity costs
What is the minimum contract price?
Total net relevant cash flows associated with contract
When is the min pricing approach useful?
- Situations with intense competition
- Surplus production capacity
- Clearance of old inv
What is the min price effectively the same as?
Break even price
What are the main decisions to be made involving joint products?
- Carry out whole process or not
- Whether or not to further process products
What are quantifiable business benefits of acting ethically?
- Lowers business risk
- Attractive to customers
- Attractive to employees
- Less time dealing with regulatory bodies
- Save by not paying damages/fines
How can acting ethically cause issues?
- Strategy easily copied by rivals
- Adds costs
- Success often relies on trial and error
- Lack of global consistency
Is apportionment relevant to further processing decisions?
No
Is a bad debt provision relevant for decision making?
No as it is an accounting entry
How is the profitability calculated?
Contribution/time
