Decision Making-A (Cost Concepts & their Application) Flashcards
What is Relevant Cost
What are two conditions that must be met?
C ash
I ncremental (or differential)
F uture
Two conditions - Simulatenouly
- Occur in Future
- Differe among alternative courses of action
Book Value of Equipments
Old?
Disposal?
New
No
Y
Y
- Opportunity cost - What is it? & When
- Notional cost- What & When
- Avoidable cost
- Historical
- Sunk
- Out of pocket
- Discretionary
- Shut down
- Engineered cost
- Differential/Incremental
- Absorbed overheads
- Value of the next best alternative - considered when ALTERNATIVES ARE COMPARED
Multiple inputs may have multiple usages. These inputs have cost and this cost is measured @ value of sacrifice made by the alternative action
- Notional cost - measurement to reflect usage of resources to reflect use of resources that have no actual (observable) cost e.g int. cost for internally generated funds
When - Relevant only if benifits are foregone by employing resources to alternative course of action
- Costs that can be skipped if decision is taken - Relevant
- Incurred in past - Not relevant
- Irrecoverable & Comitted - Not relevant
- Cash expenditure
- Which can be changed by decision of manager or other decision making AUth.
- That can be avoided on shut down (production cost+discretionary FC)
- results from defined mathematical relationship
- Difference in total cost due to alternatives
- Generally irrelevant
Decision on Acceptance of new offer
sunk
opportunity
differential
Absorbed overheads
Two methods for decision making with comparison
- Only relevant cost to be considered for analysis
- Consider (full/all) cash flows
Cost sheet of a product with relevant cost
Choosing profitable course of action
Pricing against a special order
Budgeting overhead cost and pricing decision
With Opportunity and sunk cost - Ex 1
With Opportunity and sunk cost - Ex 2
With Opportunity and sunk cost - Ex 3
Acceptance of offer
Acceptance of offer 2
Acceptance of offer 3
Acceptance of offer 4
Decision on Different option of services
Decision on use of alternative resources
