Relevant Costs Flashcards
Relevant Costs
A cost that only relates to a specific management decision
Sunk Costs (Relevant Cost)
Arise from past decisions or transactions, thus it is IRRELEVANT for future decision
Out-of-pocket costs (Relevant Cost)
Are items that require future outlay of cash, it is RELEVANT for current and future decision making
Opportunity Cost (Relevant Cost)
Is the potential benefit lost by choosing a specific action when two or more alternative choices are being decided upon
> > if not idle capacity = RELEVANT
if with idle capacity = IRRELEVANT
Differential Cost ( (Relevant Cost)
The additional costs incurred if a company pursues a certain course of action under different choices or alternatives
Make-or-Buy Decisions
Is a determination scenario on whether an item should be made internally or bought from an outside supplier.
> > Fixed Overhead: IRRELEVANT
Accept or Reject a Special Order
The entity is to check whether it will be beneficial for them to accept a special order at a certain one-time special selling price.
> > if no effect on regular sales: fixed cost and opportunity costs are irrelevant. Accept if the minimum price for the product is equal to or greater than the variable costs
> > no excess capacity: fixed costs and opportunity costs are relevant
Eliminate, retain, or add
the entity is to check whether it will be beneficial for them to eliminate a segment, product line, or department, have it retained, or add a new one
Shutdown or Continue Operations
In cases of sustained losses or unexpected events, the entity might consider shutting down operations.
The entity should consider whether the relevant costs of shutting down is greater than just simply continuing
Sell as is or process further
Deciding on whether to sell items as is or if it needs to be processed further arises on products that underwent a single raw material input.
> > Compare profit at split-off point or after processing further
