Chapter 8 - Relevant costing Flashcards
What are some short-term decisions made by a business?
- make vs buy
- shut down
- one-off contract
- further processing decisions
When a business is making a short-term decision what should it consider?
- the relevant cash flows that arise as a result of this decision:
Cash position if accept proposal (A)
Cash position if reject proposal (B)
RCF = A-B
What is a relevant cash flow?
a future incremental cash flow
What are sunk costs?
costs that have already been incurred in the past
Are sunk costs a relevant cost?
no
Are future costs a relevant cost?
Yes
Are fixed costs relevant costs?
no unless there is an incremental fixed cost as a result of the decision
What are committed costs and are they relevant costs?
they are costs that are unavoidable in the future, not affected by the decision and should therefore be ignored
Are opportunity costs a relevant cost?
yes
What cash items are relevant costs?
only ones relevant to the decision e.g., depn is not relevant
What are opportunity costs?
the value of the best alternative that is foregone when a particular course of action is undertaken
What are the relevant costs with non-current assets?
- purchase price of any new machinery
- if existing machine being used that may have been sold then the OC is the proceeds foregone
- Scrap/disposal proceeds
- If existing machine taken from another dept and not replaced then OC = lost contribution.
What items are not relevant with non-current assets?
- Depreciation
- Profit or loss on disposal
- original purchase price of asset
- NBV of existing machinery
What is the minimum contract price?
total net relevant cash flow associated with the contract
What is the relevant cost in a make-or-buy decision with no limiting factors?
the differential costs between the 2 options
In a make or buy decisions with a limiting factor how do we find the saving per unit of each product? (1)
Saving = purchases price - VC to make
In a make-or-buy decision with a limiting factor how do we find the saving per unit of the limiting factor? (2)
Divide the saving from step 1 by the amount of scarce resource
What is the 3rd step in the make-or-buy decision with a LF?
Rank the products. The higher the saving the greater the priority to make
What are some non-financial benefits of buying in?
Specialist skills: external suppliers may possess specialist skills not available in-house
Alternative use of resource: outsourcing will free up resource
What are some concerns of buying in?
Reliability of suppliers: pricing, delivering on time, quantity required, quality required.
Social
Legal
Confidentiality
Customer reaction
What are some quantifiable cost or benefit of closure?
- lost cont from the area being closed
- savings in specific fixed costs from closure
- known penalties and other costs resulting form closure
- any known reorganisation costs
What are some non-quantifiable costs or benefit of closure?
- penalties and other costs resulting from the closure (redundancy)
- knock on impact
What are joint costs?
costs incurred before the split off point when more than one product is being made
Are joint costs relevant costs?
No they are common costs
