Relevant Costing

Question 1

How are relevant cost determined?

Answer 1

It is usually consist of future cash outgoing and cash incomings (cashflow). A cashflow in the future as a result of a decision.

Question 2

What are relevant cost characteristics?

Answer 2

*In the future
*A consequence of the decision taken (i.e. incremental)
*Measured in cash flow changes.
* Opportunity cost are relevant cost.

Question 3

What are relevant cost used for?

Answer 3

• Allocation of limiting factors between alternative uses.
  *Make or buy decisions
  *Accept or reject decisions for one-off orders
  *Minimum price decisions/

Question 4

Minimum price decisions

Answer 4

It is relevant cost, the minimum you can charge before making a loss.

Question 5

Advantages of relevant costing

Answer 5

*Gives the optimal decision in the short run, great for short term decisions.

Question 6

Disadvantages of relevant costing

Answer 6

*Not suitable for long run because it might not cover the costs of resources when originally bought.
*Conflicts with financial reporting account of profit because costs of decision will be shown as historical cost.

Question 7

Three conditions in order for a cost to be relevant?

Answer 7

• Must be cash
  *Must be future related
  *Must be because of the decision