Relevant Costing

Question 1

what is relevant costing?

Answer 1

performing a cost analysis where the only costs that are considered are those that will change an alternative option is taken.

Question 2

what is an opporrtunity Cost?

Answer 2

the cost of giving up the NEXT BEST alternative

Question 3

What are some scenarios where the application of relevant costing would be very relevant

Answer 3

1. Special selling Price decisions
2. Product mix decisions when capacity constraints exist
3. Replacement of equipment Decisions
4. Outsourcing (make or buy) decisions
5. Discontinuation Decisions

Question 4

when making relevant costing decisions, what is the objective?

Answer 4

To maximize profit because that would maximize the shareholder’s wealth

Question 5

what is the term “contribution per limiting factor” mean?

Answer 5

It is the amount Sales less variable costs per unit of limited resource

Question 6

What are some scenarios you would encounter with limited Resources?

Answer 6

1. one resource is limited and some existing units need to be cut
2. Two resources are limited and 2 units could be potentially cut
3. Two limited resources and 2 units could be cut and only given contribution per limited resource instead of quantity of resources used per product

Question 7

Missconceptions regarding relevant costing

Answer 7

1. Only sales Revenue and Variable costs are relevant for decision making.
2. Only Direct costs are relevant
3. A unit cost is a relevant cost

Question 8

What is the theory of Constraints?

Answer 8

the theory that bottlenecks in resources should be removed until they can’t be anymore and then should be fully utilized.

Question 9

How do we apply the theory of constraints

Answer 9

1. Identify the bottlenecks in the system
2. Decide how to make full use of the bottlenecks
3. subordinate everything else according to those bottlenecks
4. Elevate the bottlenecks, if completed, go back to step 1, if not, continue in business

Question 10

Are Joint Costs a relevant cost?

Answer 10

No, because you incur them to make the other product still (which is why they are called joint costs)

Question 11

How would you calculate the relevant cost when one resource is limited and some existing units need to be cut?

Answer 11

Answer must still be formulated (look inside of assignments)

Question 12

How would you calculate the relevant cost when Two resources are limited and 2 units could be potentially cut? (Because they both use thar resource)

Answer 12

• First you need to work out the contributions per unit of limited resource from each product
• If one product has the lowest contribution per limiting factor of both resources, then that product needs to be cut
• if one product has the lowest contribution of A limited resource while the other product has the lowest contribution per limiting factor of the other resource, I have no idea what to do then
• then work out the revenue you are losing by cutting that product
• you will need to cut that product no matter what else happens

Question 13

How would you calculate the relevant cost when Two limited resources and 2 units could be cut and only given contribution per limited resource instead of quantity of resources used per product?

Answer 13

Answer must still be completed (look in assignments)