Decision Making + Relevant Costs

Example of *future costs* that need not be considered

fixed overheads e.g. rent on building, will always be same and not change as result of decision

Example of where *fixed overheads* would be relevant

in decision of subletting building or keeping (pay or don't pay)

Committed costs (def.)

non-reversible costs e.g. contractual obligation

Relevant costs include..?

opportunity costs, incremental costs (differential outlay costs) + avoidable costs

Cost (def.)

'the resources sacrificed'

Future/outlay costs (other word.)

*incremental costs

Which costs do not count in management accounting?

Historical (sunk) costs + committed costs

Irrelevant costs include..?

all past (sunk) costs, committed costs, non-differential future outlay costs (don't change with decision e.g. rent)

Relevant cost (def.)

cost used when making decisions about future of unit

Avoidable costs (def.)

costs that could be avoided/minimised if take different course of action e.g. outsourcing

Opportunity cost (def.)

current market value/what could get for asset and is *relevant cost* for any decisions made

Issues with subcontracting work that are not quantitative

qualitative: hit employee morale if could have been done just as easily in-house, subcontractor may not come through on time etc.

For *future (outlay) costs* to have relevance, must..?

relate to + *affect future profits + returns*, be *cost yet to be incurred* + *change* as *result of decision*