Relevant Costs for Decision-Making Flashcards
What is a relevant cost?
A cost that differs between alternatives
What are avoidable costs?
Costs that can be eliminated (in whole or in part) by choosing one alternative over another
What are unavoidable costs?
They are never relevant and include sunk costs and future costs that do not differ between the alternatives
What is a sunk cost?
A cost that has already been incurred and that cannot be avoided regardless of what a manager decides to do
How do we identify relevant costs?
Eliminate all the sunk costs, eliminate the future costs that don’t differ between alternatives and all that will be left are the avoidable costs
What is a make or buy decision?
A decision concerning whether an item should be produced internally or purchase from an outside supplier
What are the advantages of making an item internally?
Reduces dependence on suppliers, quality control may be easier and profits can be realised on the parts and materials
What are the advantages of buying an item from an external supplier?
A supplier can realise economies of scale and may be able to move more quickly up the learning curve, may be able to respond more quickly and at less cost and changing technology may make producing ones own parts riskier
What are opportunity costs?
The economic benefits that are forgone as a result of pursuing some course of action. They are not actual monetary outlays and are not recorded in the accounts of an organisation
What are special-orders?
One-time orders that do not affect a company’s normal sales
What should the profit from a special order equal?
It equals the incremental revenue less the incremental costs
How do we rank the profitability of products or orders?
In terms of their contribution margins per unit of the constrained resource
What are joint products?
When two or more products are produced from a common input
What is a split-off point?
The point in the manufacturing process where each joint product can be recognised as a seperate product
