Relevant cost for decision making chapter

In deciding which option to choose he will need all the information which is relevant to his decision; and he must have some criterion on the basis of which he can choose the best alternative.

Buy Decisions Make vs. The relevant costs are the variable costs incurred by the manufacturer to make the wood cabinets and the price paid to the outside vendor. However, "internal" sources are just as important, none more so than financial information.

Structure of the chapter Often "information" is interpreted by marketers as being "external" market based information. The Differences Between Make vs. The chapter looks at the relevant elements of cost for decision making, then looks at the various techniques including breakeven analysis.

A future cash outflow that will be incurred anyway, whatever decision is taken now, e. The better of these alternatives, from the point of view of benefiting from the leather, is the latter.

Example A company is considering publishing a limited edition book bound in a special leather.

If the costs to be eliminated are greater than the revenue lost, the outdoor stores should be closed. An opportunity cost is the benefit foregone by choosing one opportunity instead of the next best alternative. Because these costs have already been incurred, they are not relevant. The company has no plans to use the leather for other purposes, although it has considered the possibilities: Costs which will be identical for all alternatives are irrelevant, e.

Expenses such as depreciation are not cash flows and are therefore not relevant. The leather exists and could be used on the book without incurring any specific cost in doing so.

Another name for past costs, which are always irrelevant, e. This chapter is intended to provide: It is therefore common to find an objective that will maximise profits subject to defined constraints.

Say, for example, a furniture manufacturer is considering an outside vendor to assemble and stain wood cabinets, which are then finished by adding wood handles and other details.

Fixed costs, such as a factory lease or manager salaries are irrelevant, because the firm has already paid for those costs with prior sales. Assume, for example, a chain of retail sporting goods stores is considering closing a group of stores catering to the outdoor sports market.

Past costs are irrelevant, as we cannot affect them by current decisions and they are common to all alternatives that we may choose. Key terms The need for a decision arises in business because a manager is faced with a problem and alternative courses of action are available.

Elements of a decision A quantitative decision problem involves six parts: The relevant costs for decision purposes will be the sum of: Any costs which would be incurred whether or not the decision is made are not said to be incremental to the decision.

If a client wants a price quote for a special order, management only considers the variable costs to produce the goods, specifically material and labor costs.

To affect a decision a cost must be: If the vendor can provide the component part at a lower cost, the furniture manufacturer outsources the work. The cost was incurred in the past for some reason which is no longer relevant.

This chapter will concentrate on quantitative decisions based on data expressed in monetary value and relating to costs and revenues as measured by the management accountant. Relevant costs may also be expressed as opportunity costs.

Some of the factors affecting the decision may not be expressed in monetary value. Other important business decisions are whether to source components internally or have them brought in from outside, and whether to continue with operations if they appear uneconomic.

Now attempt exercise 5. The chapter examines the techniques useful in helping to make decisions in these areas. Factoring in a Special Order A special order occurs when a customer places an order near the end of the month, and prior sales have already covered the fixed cost of production for the month.Cost: Chapter 11 HW - Decision Making.

STUDY. PLAY. VC will generally be RELEVANT for decision making because they.

Relevant Cost

Have not been committed and are likely to differ between decision options. A cost is not relevant for decision making if it. Does not differ for each option available to the decision maker.

The concept of relevant cost is used to eliminate unnecessary data that could complicate the decision-making process. As an example, relevant cost is used to determine whether to sell or keep a.

A relevant cost is a cost that only relates to a specific management decision, and which will change in the future as a result of that decision.

The relevant cost concept is extremely useful for eliminating extraneous information from a particular decision-making process. Also, by eliminating irrele. The chapter looks at the relevant elements of cost for decision making, then looks at the various techniques including breakeven analysis.

Other important business decisions are whether to source components internally or have them brought in from outside, and whether to continue with operations if they appear uneconomic. Chapter 13 Relevant Costs for Decision Making Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Sardi Inc.

is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 17, of the components each year.

Chapter 13 Relevant Costs for Decision Making - GARRISON. AIS Exam. Cost Concepts for Decision Making A relevant cost is a cost that differs between alternatives. 2 1 Documents Similar To Chap Relevant Costs for Decision Making.

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