Ch4: Relevant Cost Analysis Flashcards
(1) Relevant Costing (2) Non-Relevant Costing (3) Opportunity Costs (4) One-Off Contracts - Minimum Price (5) One-Off Contracts - Materials (6) One-Off Contracts - Labour (7) One-Off Contracts - Non-Current Assets (NCA) (8) One-Off Contracts - Non-Financial Factors (9) Shut-Down Decisions - Relevant Costs (10) Shut-Down Decisions - Non-Financial Factors (11) Joint Products (12) Make vs Buy - Outsourcing (13) Make or Buy - In House (21 cards)
What are Relevant Costs?
- Relevant costs are those affected by specific management decisions.
- They include:
(1) Future Costs and Revenues,(2) Incremental Costs
(3) Cash Flows
What are Avoidable Costs?
Avoidable Costs are those which would be avoided if a particular course of action were taken
What are Controllable Costs?
Controllable Costs are costs that can be influenced by the actions of the person who controls the budgets or cost centers.
What are Sunk Costs?
Sunk Costs are historical costs of an asset that are past costs and therefore irrelevant to any decision.
What are Committed Costs?
Committed Costs are future cash flows that are not incremental, such as contract rental and lease payments.
Why are Fixed Costs generally considered Non-Relevant?
Fixed costs are incurred regardless of the decision being taken and are therefore irrelevant.
Why is Depreciation not considered a Relevant Cost?
Depreciation is not a cash flow but a method of accounting for past capital expenditure, making it irrelevant.
What is an Opportunity Cost?
Opportunity Cost is the value of the benefit sacrificed when one course of action is chosen in preference to an alternative.
What is the Minimum Price (Pmin) in One-Off Contracts?
The Minimum Price that makes a contract worthwhile is equal to the relevant cost, which is the price at which the business would break even.
How is the Relevant Cost of materials determined if they have already been acquired and are used regularly?
The Relevant Cost would be the replacement cost (current market value).
How is the relevant cost of labour determined if the organisation has spare (idle) labour time?
The Relevant Cost is zero.
How is the relevant cost of labour determined if additional labour time is required without taking workers away from other activities?
The Relevant Cost is the direct cost of labour.
How is the relevant cost of labour determined if workers need to be taken away from other profitable activities?
The Relevant Cost is the direct cost plus the lost contribution from other activities.
What is the fall in Realisable Value for Non-Current assets (NCA)?
The fall in Realisable Value is the Relevant Cost if the asset is not used for other purposes or has spare capacity.
What is the Deprival Value for Non-Current Assets (NCA)?
Cost of depriving the business of the asset.
- Value In Use is determined by the HIGHER OF:
(1) Net Realisable Value
(2) Economic Value.
KEEP or SELL Asset -
Economic Value > Net Realisable Value
KEEP Asset
What are the decision processes that need to be taken when determining the Deprival Value?
DECISION 1:
Should the asset be kept in use in the business or sold?
IN USE then ECONOMIC VALUE > NET REALISABLE VALUE.
DEICISION 2:
LOWER OF:
(1) Replacement Cost
(2) HIGHER OF: (a) Net Realisable Value and (b) Economic Value.
What are Joint Products?
Arise where the manufacture of one product makes the manufacture of another product inevitable, and they have significant sales value.
What are the advantages of Outsourcing?
- Cost Saving.
- Access to Expertise.
- Release of Capital.
- Freeing up Capacity.
- Potentially higher quality from specialist suppliers.
What are the disadvantages of Outsourcing?
- Loss of Control.
- Impact on Quality.
- Flexibility and Reliability of the Supplier.
- Potential Loss of Confidential Information.
- Impact on Employees’ Morale.
What factors should be considered in Make vs. Buy Decisions?
- Use of Spare Capacity.
- Potential Industrial Disputes,
- Reliability of Subcontractors.
- Desire for flexibility and quality control.
