Accounting Topic 6 (Measuring Relevant Costs and Revenues for Decision Making)

Question 1

sunk costs

Answer 1

-historic costs
- already incurred
- can’t be recovered
- unaffected by choice between alternatives
- should not be considered in making future decisions

Question 2

examples of sunk costs

Answer 2

salaries of current employees
PP&E costs
MR
R&D

Question 3

short term decision making

Answer 3

• make or buy?
• retain or close product line/division (shutdown)
• accept special order

Question 4

relevant costs

Answer 4

• future cash flow arising as a direct consequence of a decision
• incremental = only extra costs incurred/saved as a result of decision are relevant
• cashflow = only cashflow info is required (ignore depreciation)
• costs that change as a result of particular decision and should be considered when making the decision

Question 5

Relevant cost analysis

Answer 5

part of a new projects viability report

Question 6

avoidable costs

Answer 6

• can be identified with an activity/decision
• can be avoided if the activity did not exist
• always relevant
• eliminated by taking a specific action
• not be incurred if a particular decision is not made

Question 7

unavoidable cost

Answer 7

• sunk costs
• future costs that do not differ between the alternatives
• unavoidable costs are never relevant
• cost that can not be eliminated regardless of any decision made

Question 8

opportunity cost

Answer 8

benefit foregone by selecting 1 course of action in preference to an alternative
- choice between alternatives, chose option A - profit missed from B is an opportunity cost

Question 9

Relevant costs - materials

Answer 9

inventory - in continual use, no other use, scarce

Question 10

relevant costs - labour

Answer 10

Question 11

3 types of relevant costs

Answer 11

1. avoidable
2. unavoidable
3. opportunity

Question 12

relevant costs - overheads

Answer 12

• variable costs will be relevant costs
• fixed costs will be irrelevant to a decision
• may be times when FCs are relevant

Question 13

general fixed overheads

Answer 13

• never relevant
• unaffected by decision
• often apportioned share of fixed costs

Question 14

make or buy

Answer 14

make in house vs outsource/purchase
start ups = may buy
make = maintain control over work performed (cheaper) (distract from innovation)
buy = impose buying & negotiation power

capacity drives opportunity costs
decisions based on relevant costs (ignore sunk/unavoidable)

Question 15

shutdown decisions

Answer 15

• closure of divisions/products (appear to be loss making)
• decisions not made on: profitability under absorption costing, fails to consider relevance of fixed overheads
• focus on relevant costs (and revenues) if closure is made
• impact whole org

Question 16

choosing the relevant cost

Answer 16

always chose the cheaper one