Relevant Costs

Relevant Cost

A cost that differs between alternatives. These should be considered in deciding which alternative to pick.

Sunk Costs

A cost that has been incurred and can not be recovered or un-incurred by some future action. Thus, regardless of the alternative chosen, the sunk cost can not be recovered. Never Relevant! (Buying/selling assets)

Unavoidable Costs

A costs that exists under all decision alternatives. Never Relevant! Some fixed costs.

Tactical decision making

Compare a handful of alternatives by analyzing the costs of each alternative. The least cost alternative is chosen. Immediate or limited end in view. Short-run in nature, but need to serve a larger purpose.

Joint costs

Costs incurred up to the split-off point

Examples of Tactical Decsions

Make or Buy Keep or Drop Special orders Sell or process further Product Mix

Make or Buy

Should a component part to the company's product or service be produced internally or should the component part be purchased from an outside supplier (outsourcing)

Special order decisions

Special orders are orders that are not part of a company's sales. Typically one-time orders usually requested at a lower selling price than regular sales

Keep or Drop

The company must decide whether a segment of a business should be kept or eliminated

Split-off point

The point in the manufacturing process where each joint product can be recognized as a separate product

Opportunity Cost

a benefit given up by choosing one alternative over another. Always relevant!!

Avoidable Cost

a cost that can be eliminated, either in whole or in part, by choosing one alternative over another. Always Relevant! Includes all variable costs and some mixed costs

Allocated Costs

a cost that can not be directly linked to a product or activity. It is therefore assigned to the product or activity using some sort of arithmetic process. Never relevant! (Rent, salaries)

Joint products

two or more products produced from the same raw material input