Chapter 9 Flashcards
Definition of relevant costs
Cost appropriate to a specific management decision. These are represented by future cash flows, whose magnitude will vary depending upon the outcome of the management decision made.
Characteristics of a relevant cost
Future – a decision being made today cannot change the past. Any future costs are considered
Incremental – only those costs that are affected by the decision of relevant.
Cash flow – these are factual and not based upon accounting conventions. Non-cash flows are non-relevant e.g. depreciation 
Fixed costs
Relevant costing
Fixed costs are never relevant costs in short-term decision-making, unless the question says that the cost will be incurred if a certain decision is made. Then they are avoidable fixed costs and are relevant. This may be needed in the decision on whether to shut down part of the company,
I fixed cost of changing, and with a absorption rate are not relevant for short-term decision-making 
Relevant costs of machines and other non-current assets.
Decision tree.
Lower off replacement costs and (higher of net realisable value and economic value in the business close.)
Opportunity cost
A relevant cost when organisation faces a choice over what to do. The opportunity cost is the benefit foregone by choosing one course of action instead of the next best alternative. 
Relevant costs and accounting concepts
Under accruals concept, cost to account for the period to which they relate. Relevant costs in is concerned with future costs and accruals is not relevant.
Relevant costs do not need to be allocated i.e. appreciation and I’m not accounted for in the same way.
Relevant costs may not always feel the criteria of reliability since they’re incurred in the future and may not be certain
Relevant costs should always be relevant in terms of the decision being made
If a business is choosing between options, the information must include all relevant costs and benefits relating to each option to be comparable 
Relevant costs may deal with decisions for which the going concern concept does not apply, for example, shut down decisions, or make assumptions that are contrary to going concern, for example, ignoring fix costs
Strategic issues to consider
Reasoned decisions 
Impact on staff. Staff issues should be considered if any decision whereby their position is being potentially changed.
How are your existing customers going to react?
What is the impact likely to be on your suppliers?
Do you really have the resources to implement the decision (cash, skills).
What is the likely response by your competitors going to be
Political and legal factors?
