Short-term Decision Making

Question 1

What is the definition of Relevant Costs?

Answer 1

Costs appropriate to a specific management decision. Represented by future cashflows whose magnitude will vary depending upon outcome of management decision made.

Question 2

What are the 5 characteristics of relevant costs?

Answer 2

1. Future
2. Incremental- extra costs due to decision
3. Cash flow - money is actually exchanged.
4. Opportunity costs - value of a benefit sacrificed because of a decision made.
5. Avoidable costs

Question 3

What are the characteristics of NON Relevant costs?

Answer 3

1. Sunk costs- already spent.
2. Committed costs
3. Notional costs - non-cash items
4. Fixed costs - rent paid every month

Question 4

What are the three Relevant costs of Machinery?

Answer 4

1. Repair costs arising from use.
2. hire changes
3. fall in resale value arising from use

Question 5

When is Relevant Costing used to make decisions?

Answer 5

1. Minimum price.
2. Accept or reject
3. Make or buy
4. Shutdown
5. Further processing

Question 6

What are the 4 things to consider in a Make or Buy decision?

Answer 6

1. Spare capacity
2. Could it cause an industrial dispute
3. Would the subcontractor be reliable
4. Do we want to be flexible and maintain better control over it ourselves.

Question 7

What are the 4 Assumptions made in Relevant Costing?

Answer 7

1. Cost behaviour patterns are known with certainty
2. Costs, prices and volumes are known with certainty.
3. Objective is to maximise profit/contribution
4. Information is complete and reliable.

Question 8

What are the steps to calculate the Relevant Cost of Material?

Answer 8

~Not in inventory - have to buy it- current replacement cost
~In continuous use- if taken from inventory will be replaced- current replacement cost
~ No other use - won’t be replaced- current resale value
~Scarce - if taken from inventory- can’t be replaced- opportunity cost

Question 9

What are the steps to calculate Relevant cost of Labour and variable overheads?

Answer 9

~Spare capacity - additional work can be undertaken- 0
~Full capacity - additional work cannot be undertaken:
1. Hire more staff - current rate of pay
2. Cannot hire more staff- variable cost and contribution (opportunity costs)

Question 10

On which 3 bases can joint costs be apportioned to products?

Answer 10

1. Physical quantity
2. Relative sales value
3. Net realisable value