Relevant Costing Flashcards
What are differential cash flows?
The cash flows that will be affected by a decision that is to be taken, also known as incremental cash flows
Differential cash flows are crucial for decision-making as they help evaluate the financial impact of different choices.
Define facility sustaining costs.
Common costs that are incurred to support the organization as a whole and which are normally not affected by a decision that is to be taken
Facility sustaining costs are typically fixed costs that do not change regardless of specific decisions.
What are limiting factors?
Scarce resources that constrain the level of output
Limiting factors can include materials, labor, or production capacity.
What are opportunity costs?
Costs that measure the opportunity that is sacrificed when the choice of one course of action requires that an alternative is given up
Opportunity costs are essential for evaluating the true cost of decisions.
Define relevant costs and revenues.
Future costs and revenues that will be changed by a particular decision, whereas irrelevant costs and revenues will not be affected by that decision
Identifying relevant costs is key for effective financial decision-making.
What are sunk costs?
Costs that have been incurred by a decision made in the past and that cannot be changed by any decision that will be made into the future
Sunk costs should not influence current decision-making as they are already incurred.
Is relevant costing a short term or a long term decision making tool?
A short-term decision-making tool
Define a relevant cost.
It is a future differential cash flow
What type of costs must be excluded when considering relevant costs?
1) Sunk costs
2) Non differential costs
3) Non cash flow costs
Are accounting expenses like depreciation considered cash flows?
No, they are not cash flows
What must a cash flow do to be considered a relevant cost?
It must differ among alternatives (I.e it must be differential)
Why are fixed overhead costs misleading for short-term decisions?
This is because relevant costing is a short term decision-making tool, whereas fixed costs are related to making capacity available, of which, the short term capacity cannot be changed.
+ The fixed cost as a whole
will be incurred in the short term, regardless of the decision made.
What is the role of historical costs in decision making?
They are useful in predicting future events
What costs are typically relevant for special orders?
Variable costs that would be affected by accepting the orders
Under what condition might fixed costs be considered relevant?
If the decision affects certain fixed costs immediately or in the future
What is a contribution margin?
The amount that contributes towards covering fixed costs
What should decisions about special orders depend on?
Revenues and costs expected to be different among alternatives
What is an opportunity cost?
The next best alternative forgone
What does the opportunity cost of lost sales typically represent?
The contribution margin forgone
Fill in the blank: A _______ is a decision within a decision.
nested decision
True or False: Fixed costs are always relevant in short-term decision making.
False
What happens to the fixed costs in the short term regardless of the decision?
They will be incurred
What is the criteria for a cost to meet the ‘future’ requirement in relevant costing?
It must not be sunk
On the basis of relevant cost approach, is it possible that some special orders should be accepted at selling prices below the average unit costs that include variable costs, as well as a portion of fixed costs?
Yes because the special order could still provide a positive contribution margin and thus contribute towards covering fixed costs.
