Relevant Costs Flashcards
What is Relevant Costs?
Cost that MUST be taken into account when making decisions
What are the characteristics of Relevant Costs?
- Future costs
- Cash flow
- Difference between alternatives
Non-relevant Costs
Costs that aren’t relevant for management decision making purposes
Characteristics of Non-relevant Costs
- Sunk costs
- Allocated fixed costs
- Normal depreciation
- Future costs that don’t differ from alternatives
Opportunity Cost
Value of benefit given up after one alternative is chosen over another
Is something sacrificed?
Differential Cost
Additional costs incurred due to a decision taken (Relevant Cost)
Difference in costs between two alternatives
Sunk Cost
Costs ALREADY incurred, should not be taken into account for decision-making purposes
Can’t be changed by a decision now or in the future
Avoidable Cost
Costs that can be avoided if activity no longer exists
Incremental Cost
Increase cost
Decremental Cost
Decrease cost
Examples of qualitative factors in decision making
Availability of cash
Inflation
Employees
Customers
Time factors
Suppliers
Short term of PoP (Price of Products)
Any price higher than VC + Additional FC (provided normal sales aren’t provided)
Long term of PoP
Full costs basis followed (All costs) -> VC, Production, Sales & Admin
Make or Buy: Capacity available
Compare VC of manufacture with Purchase Cost of product
Make or Buy: Capacity unavailable
Both VC & FC compared with Purchase Price
