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Relevant Costing Notes

The document outlines incremental analysis and relevant costing methods for decision-making among alternatives. It emphasizes that all variable costs are relevant, while fixed costs are generally irrelevant unless avoidable. Key scenarios discussed include make or buy decisions, special orders, equipment replacement, segment elimination, and further processing of products, focusing on comparing additional revenues and costs to determine the best option.

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Dacuya Macmac L.
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65 views1 page

Relevant Costing Notes

The document outlines incremental analysis and relevant costing methods for decision-making among alternatives. It emphasizes that all variable costs are relevant, while fixed costs are generally irrelevant unless avoidable. Key scenarios discussed include make or buy decisions, special orders, equipment replacement, segment elimination, and further processing of products, focusing on comparing additional revenues and costs to determine the best option.

Uploaded by

Dacuya Macmac L.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

INCREMENTAL ANALYSIS / RELEVANT COSTING

 method of choosing the best option among alternatives

Future General Rule:


Relevant Cost - All variable cost are relevant. (DM, DL, VOH, VS&A)
Incremental/Differential
 cost must differ among alternatives - FC are relevant if avoidable, otherwise, irrelevant

Types:

1. Make or Buy
 Choose the option that has the lower cost.
 In most cases, fixed costs are irrelevant.
 Consider opportunity costs, if any.
 Opportunity costs: The potential benefit that may be obtained by following an alternative course of
action.
w/ excess capacity o for relevant cost, apply General Rule
2. Accept or Reject Special Order w/o excess capacity o General Rule + Opportunity Cost (lost CM)

 Accept the order when the additional revenue from the special order exceeds additional cost
 Provided the regular market will not be affected.
 In most cases, fixed are irrelevant
 The relevant information is the difference between the variable manufacturing costs to produce the
special order and expected revenues.
 If the company is operating at full capacity, it is likely that the special order would be rejected.

3. Retain or replace equipment


 Relevant items to be considered:
x The effects on variable costs
x The cost of the new equipment
 Any disposal value of the existing asset must also be considered
 Book value of old asset is irrelevant o Sunk Cost

4. Retain or Eliminate unprofitable segment/product


 Continue if segment’s avoidable revenue is greater than the avoidable costs;
 Otherwise consider shutting down the segment since allocated fixed cost is usually unavoidable, it is
considered irrelevant.
 Sales
- VC
- FC (avoidable)
Segment Margin + retain
- eliminate

5. Sell immediately or Process Further


 Process further if additional revenue from processing further is greater than further processing costs.

Split-off point

Joint Cost A
(DM, DL, OH) B Further processing cost (FPC)
Common; C
Sunk Cost

Rule: Process further of incremental revenue > incremental cost


↑ in SP (FPC)

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