P2 - 4. Relevant Costs and Decision Making

Question 1

What are relevant costs?

Answer 1

Costs appropriate to specific management decisions

Question 2

What are the 3 clear criteria for a cost to be deemed relevant?

Answer 2

1. Future
2. Incremental
3. Cash flow

Question 3

When a decision has been made in the past and therefore not a relevant cost, what is that cost called?

Answer 3

Sunk or committed

Question 4

When a cost is not changed by the decision and is therefore not a relevant cost, what is that cost called?

Answer 4

Fixed

Question 5

What is the major example of a non cash flow, non relevant cost?

Answer 5

Depreciation

Question 6

What is an opportunity cost?

Answer 6

The value of benefit sacrificed when one option is chosen over the next best alternative - benefit foregone

Question 7

What is an avoidable cost?

Answer 7

One that would not exist if we had not made a decision

Question 8

What is a notional cost?

Answer 8

The cost equivalent to lost income by using something we own rather than renting/selling it

Question 9

If we are using a material that is not currently in stock, what is the relevant cost?

Answer 9

Current purchase price

Question 10

If we are using a material that is currently in stock but not in use by the organisation, what is the relevant cost?

Answer 10

Scrap/resale value

Question 11

If we are using a material that is currently in stock, and is in regular use by the organisation but cannot be replaced, what is the relevant cost?

Answer 11

The contribution (before material cost) lost if we had used it elsewhere
-> Lost contribution + material cost

Question 12

If we are using a material that is currently in stock, is in regular use by the organisation and can be replaced, what is the relevant cost?

Answer 12

Current purchase price

Question 13

If labour is not at full capacity, what is its relevant cost?

Answer 13

Zero

Question 14

If labour is at full capacity and we cannot hire more or pay overtime, what is its relevant cost?

Answer 14

The contribution (before labour cost) lost if we had used the labour hours elsewhere
-> Lost contribution + VC of labour

Question 15

If labour is at full capacity and we are able to either hire more or pay overtime, what is its relevant cost?

Answer 15

The cheaper of hiring more staff or overtime

Question 16

When are overheads considered relevant?

Answer 16

Only if they are incremental to the decision (never committed fixed or centrally apportioned)

Question 17

What is the relevant cost of a non current asset?

Answer 17

It’s deprival value

The lower of (the replacement cost) and (the higher of net realisable value or economic value in the business)