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*