Relevant Costing

• Decision making - the process of identifying, evaluating, and choosing from at least two alternative courses of action.
• Relevant costs are future costs that are expected to be different among alternatives. It is also called as differential or avoidable costs.
• For a cost to be relevant

  • Must differ between the decision alternatives
  • Future costs
• Irrelevant costs are those that will not influence a decision
• Opportunity costs - income sacrificed or forgone when a certain alternative is chosen over another alternative
• Joint costs - costs incurred in simultaneously manufacturing two or more products that are difficult to identify individually as separate types of products until the products reach a certain processing stage known as the split-off point
• Split-off point is the point in the manufacturing process where some or all joint products can be recognized as distinct and separate products
• Further processing costs - costs incurred beyond the split-off point as separated joint products are to be processed further
• Approached is solving problems that involve decision-making:

  1. Total approach
  2. Differential approach
• Total approach - the total revenues and costs are determined for each alternative, and the results are compared to serve as a basis for making decisions
• Differential aproach - only the differences or changes in costs and revenues are considered
• Decision guide for make or buy:

  • Fixed costs are irrelevant
  • Consider opportunity costs
• Decision guide for accepting or rejecting a special order:

  • Accept when addtnl revenue > addtnl costs
  • FC is irrelevant
  • OC is considered if regular sales are sacrificed
• Decision guide for continue or shutdown:

  • Continue if avoidable revenue > avoidable costs
  • Allocated FC is irrelevant
• Decision guide for sell or process further

  • Process further if addtnl revenue > further processing cost
• Cost to make:

  • Avoidable vc
  • Avoidable fc
  • Opportunity cost

  Cost to buy:

  • Purchase price
  • Materials handling
• Material handling costs are costs allocated to the product that passes thru the receiving department. The receiving department would check the validity of the material or product that enters the company and the costs incurred for checking would be allocated to the product.
• True or false.

  Variable selling and administrative expenses are variable costs but are not avoidable.

  True.
• Common examples of opportunity costs in make or buy decision:

  • Facility used to manufacture may be used for other products
  • Facility may be rented out
• Incremental costs depends whether the company has excess capacity to satisfy the special order or not
• Incremental revenue

  Less: Incremental costs

  • DM
  • DL
  • V MOH
  • V SE
  • OC
  • Addtnl. FC

  Incremental Profit
• The CM lost on cancelled regular slaes is our opportunity cost
• Continue or shutdown

  Avoidable revenues:

  • Sales revenue
  • OC

  Avoidable costs:

  • VC
  • Traceable FC
  • Avoidable common FC
  • Other Avoidable costs
• True or false.

  Common fixed expenses which are merely allocated to the segment would still be incurred and would just be re-allocated to the remaining segments.

  True.
• Sell or process further a product suggested formula

  Revenue or sp after processing further xx

  Less: Revenue or sp at split-off (xx)

  Additional revenue xx

  Less: Cost of processing further (xx)

  Incremental revenue xx
• Opportunity cost is best defined as the benefit associated with a rejected alternative when making a choice