Relevant Costing

Accept or Reject a Special Order

Accept the order when the incremental revenue from the special orders exceeds the incremental cost, provided the regular market or customers will not be affected. Fixed cost is irrelevant.

Costs that can be eliminated, in a whole or in part, as a result of choosing one alternative over another. It is considered as relevant costs.

Avoidable costs

This refers to the constraint, could be a machine or a process, that is limiting overall output in a production process.

Bottleneck

This is a fixed cost commonly shared among the business segments in an organization. This cost will not be eliminated if a business segment is discontinued. It is unavoidable cost, thus irrelevant.

Common fixed costs

Decision guidelines to Make or Buy

Consider the option that involves the lower cost. Fixed costs are irrelevant Consider the opportunity cost, if any.

Shut down cost

Costs that the company will continue to incur even when there is no operation.

Under this approach, only those costs and benefits that differ between alternatives are included in the computation to identify which is best alternative.

Differential approach

A fixed costs directly traceable to a business segment. This cost would be eliminated if a business segment is discontinued. It is avoidable cost, thus relevant fixed cost.

Direct fixed costs

Shut down point formula

Fixed cost - shutdown cost /Contribution Margin ratio

The cost that has to be incurred if a joint product is processed further into another finish product after split-off point.

Further processing costs

Product Combination(Which products should be produced and sold when there is a given limited resources or bottleneck operations?)

Identify and measure the constraint on the limited resources. Rank the products according to their highest contribution margin per unit of limited resources.

The additional profit that will be earned as a result of choosing one alternative over another net of all incremental costs. Incremental revenue - Incremental costs

Incremental Profit

The additional revenue that will be earned as a result of choosing one alternative over another.

Incremental revenue

Sell or process further (Should a joint product be sold as split-off point or be processed further as another final product?)

Incremental revenue from processing further > incremental costs of processing = process further Incremental revenue from processing further < incremental costs of processing = sell the joint product as is at split off point. Joint costs are considered sunk costs after a split-off point, thus irrelevant.

The additional cost that has to be incurred as a result of choosing one alternative than the other

Incremental value

Cost that do not differ between alternatives and does not affect management's decision making.

Irrelevant cost

This refers to all manufacturing costs incurred in the production of joint products

Joint costs

This refers to two or more products that are produced simultaneously from one production process and share a common manufacturing cost, which is a joint cost.

Joint product

Continue or discontinue a business segment

Lost of contribution margin > the fixed cost savings or the avoidable cost = Continue Lost of contribution margin < fixed cost savings = Discontinue Allocated fixed costs(unavoidable costs) are irrelevant.

A decision concerning whether an item should be produced internally or purchased from an outside supplier

Make or buy

It is loss of a future cash flow that takes place as a result of making a particular decision. It is a relevant cost.

Opportunity costs

The incremental costs that will be incurred if a particular course of action is selected. It is considered as a relevant costs.

Out-of-pocket costs

Costs that differ between two alternatives and significant in decision making

Relevant costs

Shutdown point

Sales > Shut down point = Continue operations Sales < Shut down point = Discontinue operations Take note of the shutdown costs

It is the stage in the production process at which the joint products are identifiable as separate products.

Split-off point

Past costs that cannot anymore be changed

Sunk cost

This is a past cost that cannot be changed no matter in the present. It is considered irrelevant.

Sunk cost

Under this approach, all cost and benefits are included in the computation in the computation to identify which alternative is the best. The best alternative is the alternative that gives the least cost and/or highest benefit to the organization.

Total Approach

This refers to the cost that would still be incurred by the organization whichever alternative it chooses. It is considered as irrelevant costs.

Unavoidable costs