Chapter 8 - Relevant costing

Question 1

What are some short-term decisions made by a business?

Answer 1

• make vs buy
• shut down
• one-off contract
• further processing decisions

Question 2

When a business is making a short-term decision what should it consider?

Answer 2

• 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

Question 3

What is a relevant cash flow?

Answer 3

a future incremental cash flow

Question 4

What are sunk costs?

Answer 4

costs that have already been incurred in the past

Question 5

Are sunk costs a relevant cost?

Answer 5

no

Question 6

Are future costs a relevant cost?

Answer 6

Yes

Question 7

Are fixed costs relevant costs?

Answer 7

no unless there is an incremental fixed cost as a result of the decision

Question 8

What are committed costs and are they relevant costs?

Answer 8

they are costs that are unavoidable in the future, not affected by the decision and should therefore be ignored

Question 9

Are opportunity costs a relevant cost?

Answer 9

yes

Question 10

What cash items are relevant costs?

Answer 10

only ones relevant to the decision e.g., depn is not relevant

Question 11

What are opportunity costs?

Answer 11

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

Question 12

What are the relevant costs with non-current assets?

Answer 12

• 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.

Question 13

What items are not relevant with non-current assets?

Answer 13

• Depreciation
• Profit or loss on disposal
• original purchase price of asset
• NBV of existing machinery

Question 14

What is the minimum contract price?

Answer 14

total net relevant cash flow associated with the contract

Question 15

What is the relevant cost in a make-or-buy decision with no limiting factors?

Answer 15

the differential costs between the 2 options

Question 16

In a make or buy decisions with a limiting factor how do we find the saving per unit of each product? (1)

Answer 16

Saving = purchases price - VC to make

Question 17

In a make-or-buy decision with a limiting factor how do we find the saving per unit of the limiting factor? (2)

Answer 17

Divide the saving from step 1 by the amount of scarce resource

Question 18

What is the 3rd step in the make-or-buy decision with a LF?

Answer 18

Rank the products. The higher the saving the greater the priority to make

Question 19

What are some non-financial benefits of buying in?

Answer 19

Specialist skills: external suppliers may possess specialist skills not available in-house
Alternative use of resource: outsourcing will free up resource

Question 20

What are some concerns of buying in?

Answer 20

Reliability of suppliers: pricing, delivering on time, quantity required, quality required.
Social
Legal
Confidentiality
Customer reaction

Question 21

What are some quantifiable cost or benefit of closure?

Answer 21

• 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

Question 22

What are some non-quantifiable costs or benefit of closure?

Answer 22

• penalties and other costs resulting from the closure (redundancy)
• knock on impact

Question 23

What are joint costs?

Answer 23

costs incurred before the split off point when more than one product is being made

Question 24

Are joint costs relevant costs?

Answer 24

No they are common costs