l3 : relevant costs

Question 1

what are relevant costs?

Answer 1

costs and benefits that differ between alternatives which are relevant and directly associated in making a decision

Question 2

what is the principle of relevance?

Answer 2

relevant costs are differential future cash flows. only changes in future cash flows are relevant

Question 3

are past / historical / sunk costs relevant?

Answer 3

no

Question 4

are opportunity costs relevant?

Answer 4

yes

Question 5

are outlay costs relevant?

Answer 5

yes

Question 6

what are outlay costs?

Answer 6

incremental, additional costs that make a diff. to decision making.
future costs that differ between the alternatives

Question 7

are future costs that dont differ relevant?

Answer 7

no

Question 8

what are opportunity costs?

Answer 8

future cash flow that is forgone by not taking up the opportunity

Question 9

what is the equation to calculate DFC?

Answer 9

DFC = cash outlay + opportunity costs

Question 10

what is an example of an outlay cost?

Answer 10

buying a charger for a laptop

Question 11

what is the decision rule when accepting decisions?

Answer 11

relevant costs < relevant benefits

Question 12

what is the decision rule when rejecting decisions?

Answer 12

relevant costs > relevant benefits

Question 13

give five examples of situations when making managerial decisions.

Answer 13

• whether to KEEP or REPLACE old equipment
• ADDING & DROPPING product lines & segments
• whether to MAKE or BUY key component
• whether special order should be ACCEPTED
• how to SOLVE bottleneck problem

Question 14

give four difficulties when estimating cash flows.

Answer 14

• future is uncertain, prediction is difficult
• inflation can make prediction unreliable
• recognising all impacts can be difficult
• relevant costs only considers financial consequences (need to consider non-financial)