Lecture 3 Flashcards
Relevant Cost Requirements
- Future
- Incremental
- Cash Flow
- Relate to the objective
Future
Past or sunk costs, which must be the same for all outcomes because they have already occurred, are never relevant
Incremental
Do the project do incur/gain do not do the project do not incur/gain
Cash Flow (not depreciation)
Not an allocation of overheads that are not specific to the project
Relate to the objective of the business
We assume our objective is to increase owners’ wealth
When to use relevant costing
Special pricing decisions
Product mix where there are scarce resources
Replacement of equipment
Outsourcing (make or buy) decisions
Discontinuous decisions
Special Pricing Decisions
- One-time-only orders below the prevailing market price
- In the short run we can reduce prices as long as they are larger than the relevant cost order
- The amount by which the price charged exceeds the relevant costs the order is profit generated by that ordered
- But we need to consider the qualitative aspects after we ensure the numbers work and may consider putting stipulations around the offer
Scarce resources (limiting factor analysis ) step 1
Identify the scarce resource
Scarce resources (limiting factor analysis ) step 2
Calculate contribution per unit
Scarce resources (limiting factor analysis ) step 3
Calculate contribution per unit of scarce resource for each product
Scarce resources (limiting factor analysis ) step 4
Rank products (highest contribution per unit of scarce resource first). State decision (production plan based on ranking of the products
Scarce resources (limiting factor analysis ) step 5
Optimal Plan: Show how the scarce resource is used up
Scarce resources (limiting factor analysis ) step 6
Calculate the effect of the decision on profit
