Semester 1 Week 6 PP (Measuring Relevant Costs and Revenues For Decision-Making)

Question 1

Identifying Relevant Costs and Revenues

Answer 1

Relevant costs are future costs that can differ between alternatives; only those that can be affected by the decision.
Irrelevant costs consist of sunk costs, allocated costs and future costs that do not differ between alternatives.

Question 2

Importance of Qualitative/Non-Financial Factors

Answer 2

Financial outcomes do not always provide the full story: Some qualitative factors need to be brought to the attention of management during the decision-making process.
Example. Cost of manufacturing a component internally may be more expensive than purchasing it from an outside supplier.
Decision to purchase from outside supplier -> closure decision -> closing down some facilities -> Redundancies + decline in employee morale -> (adversely) affects future output.
Also, it may lead to overly dependence to a particular supplier.

Question 3

What are the Special Studies steps?

Answer 3

1. Special selling price decisions.
2. Product-mix decisions when capacity constraints exist
3. Decisions on replacement of equipment.
4. Outsourcing decisions.
5. Discontinuation decisions.