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