Lecture 3 Relevant Costing And Short Term Decision Making Flashcards
(22 cards)
What are relevant costs?
Future costs that will be changed by a decision
Relevant costs are essential for decision-making as they directly impact future financial outcomes.
What are irrelevant costs?
Costs that remain the same regardless of the decision
Irrelevant costs do not affect the decision-making process as they do not change.
What is relevant costing (marginal analysis)?
Only costs and revenues that vary with the decision are considered
This usually means fixed costs are ignored and variable cost per unit is treated as marginal cost.
What is the impact of short-term decisions?
Impact operational efficiency and short-term profitability
Short-term decisions are often tactical and aim for immediate results.
What is the impact of long-term decisions?
Influence long-term growth and sustainability
Long-term decisions are strategic and focus on future stability and expansion.
What is the main principle for relevant cost calculation?
Relevant Cost = Additional Cost + Opportunity Cost
This formula helps in determining the true cost of a decision by including potential lost benefits.
What is an additional cost?
Costs incurred due to a specific decision
Additional costs are directly attributed to the choice being made.
What is opportunity cost?
Benefits forgone from other plans due to a particular decision
Opportunity costs represent the potential gains lost when one option is chosen over another.
What is the relevant cost for material not in stock?
Purchase cost
This is the cost incurred to acquire new materials when they are not available.
What is the relevant cost for material in stock but regularly used?
Replacement cost
The cost reflects what it would take to replace the material if used.
What is the relevant cost for material in stock but planned for sale?
Opportunity cost (selling price)
This cost indicates the potential revenue lost if the material is not sold.
What is the relevant cost for scarce material fully booked for another product?
Opportunity cost (lost contribution from other product)
This reflects the profit that could have been earned from the other product.
What is the relevant cost for labor when no spare labor is available?
New staff salary
This cost is necessary to fulfill operational needs if current staff cannot cover the demand.
What is the relevant cost for labor when no spare labor and no hiring budget?
Opportunity cost for permanent workers
This represents the value of not utilizing existing staff effectively.
What are relevant fixed overhead costs?
Ignored unless they change due to the decision
Fixed costs typically do not vary with production levels unless there is an expansion.
What is a key area of decision making using relevant costing related to pricing?
Assessing opportunities to enter contracts
This involves determining minimum contract prices based on relevant costs.
What is the purpose of make or buy decisions?
Outsourcing or subcontracting based on relevant costs
This decision is influenced by factors like cost and internal capacity.
What does efficient use of scarce resources entail?
Ranking products/services using contribution per unit of scarce resource
This ensures maximum profit is achieved with limited resources.
What should be compared in closing or continuation decisions?
Relevant benefits and relevant costs
If relevant benefits exceed relevant costs, continuation may be justified.
What are qualitative considerations in decision making?
Risk to future customer relationships, staff morale, brand reputation
Other factors include supplier reliability and time value of money.
True or False: Fixed costs are always considered in relevant costing.
False
Fixed costs are typically ignored unless they change due to a decision.
Fill in the blank: Relevant costs are used for _______ or subcontracting decisions.
make or buy
These decisions help organizations determine the most cost-effective options.
