Week 5: Relevant Costs & Revenue for Decision Making Flashcards
what are Relevant costs and revenues ?
Relevant costs/revenues are those future costs and revenues that will be changed by a decision
what are irrelevant costs/revnues?
irrelevant costs/revenues are those that will not be affected by a decision.
What type of costs are sunk costs?
Sunk (PAST) costs/ allocated costs are irrelevant costs
what are Opportunity costs?
Opportunity costs are the benefit foregone by choosing one opportunity instead of the next alternative
what are sunk costs?
Sunk costs : incurred by a decision, action or event in the past.
This cost cannot be changed by any decision that will be made in the future, hence, an irrelevant cost for decision making – unavoidable cost
E.g., common fixed costs: depreciation of equipment, facility sustaining costs – admin/property costs
What are Opportunity benefits?
Opportunity benefits (or savings) may be caused by going ahead with a decision.
For example, accepting a new project may mean that some redundancy payments for workers on the project are avoided.
The avoidance or prevention of a cash cost is equivalent to cash income. Opportunity benefits are relevant to the decision and must be taken into account.
If new material is bought do you consider the cost it was bought for or the replacement cost?
If materials used in the project need to be replaced for the future, the replacement cost needs to be considered, not the cost it was originally bought for
Are histrical costs relevant for decision making?
Historical costs are Irrelevant for decision making (though may be used as a basis for predicting future costs)
What are the key types of irrelevant costs?
Key types of irrelevant costs
Sunk costs: Costs relating to the proposal but already incurred or paid for, e.g., market research, historical cost of purchase.
Committed costs: Costs yet to be incurred but are unavoidable due to commitment made in the past, e.g., a lease contract.
Allocated common fixed costs: Costs to sustain the organization as a whole and will not change whichever alternative is chosen, e.g., general administrative and property costs.
Non-cash costs, e.g., depreciation.
If a material is in stock and has no other use and it will not have to be replaced what is the relevant cost?
If a material is in stock and has no other use and it will not have to be replaced the relevant cost is the scrap value foregone
What three things are relevant costs always?
Relevant costs are always:
1) AVOIDABLE (caused by the decision)
2) FUTURE (past or sunk costs cannot be altered)
3) CASH (as opposed to profit)
If a material is in stock and in continual use and it will have to be replaced what is the relevant cost?
If a material is in stock and in continual use and it will have to be replaced the relevant cost is the purchase price.
If a material in not in stock what is the relevant cost?
if a material is not in stock the relevant cost is the current purchase price
If a material is in stock and is scarcley used and it is taken from stock that can’t be replaced what is the relevant cost?
If a material is in stock and is scarcley used and it is taken from stock that can’t be replaced the relevant cost is the opportunity cost.
what are some important qualitative factors in decision making?
Impact on customer satisfaction
lack of control of inputs
Labour/employee moral from
closure/redundancies
Goodwill/reputation of business, etc…
what is the relevant labour cost when you can hire more people?
the relevant labour cost when you can hire more people is the current rate of pay
what is the relevant labour cost if there is spare capacity?
if there is spare labour capacity there is no relevant cost
If the labour force is at full capacity what is the relevant labour cost?
If the labour force is at full capacity what the relevant labour cost is the opportunity cost
