Relevant Costing

Irrelevant Costs

Are costs incurred by a company that do not differ in each alternative, thus, does not affect management decisions.

Out-of-Pocket Costs

Are costs that require future expenditures of cash or other resources.

Relevant Costs

Are expected future costs that differ under each alternative or in every decision made.

Qualitative Factors

Are factors that cannot be accurately expressed in terms of money or numerical unit of measure

Joint Costs

Are incurred up to the spilt-off point only.

Special Orders

Are one-time orders that do not affect the organization's normal sales.

Quantitative Factors

Are those that can more easily be expressed in terms of money or other units of measure.

Shutdown Cost

Cost incurred when business operations are temporarily discontinued

Avoidable Costs

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

Relevant Cost

Cost that differ between two alternatives and significant in decision-making

Irrelevant Cost

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

Shutdown Costs

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

Avoidable Costs

Costs that would no longer be incurred after discontinuing the segment

Unavoidable Costs

Costs that would still be incurred even if the segment is discontinued which would be covered by the remaining segments and would still affect the total profit of the organization.

Continue/Discontinue a Business Segment

In analyzing quantitative information for this scenario, costs that will no longer exist if the segment ceases and costs that will continue should be properly identified.

Differential Approach

In this method, only the relevant costs are analyzed.

Setting of Criteria

In this step, there's a need to set criteria to clarify the identification and evaluation of alternatives.

Avoidable Cost

Is a cost that can be eliminated by discontinuing or shutting down an activity or segment of an organization. It is a relevant cost.

Differential Cost Method

Is a method of relevant costing that only takes into account the differences (increases or decreases) in revenues and costs.

Total Approach

Is a method of relevant costing wherein total revenue and costs of each alternative are compared. The alternative that yields that most beneficial result to the organization is the one chosen.

Make or Buy Decision

Is concerned with whether an item/ part for a certain final product should be produced internally or purchased from an outside supplier.

Differential Approach

Is mostly used since it is shorter and puts more emphasis on the net effect (increase or decrease) of a particular alternative.

Differential Approach

Is somewhat a short-cut method in analyzing the situation for decision-making. Under this method, only the differences in revenue and costs are analyzed.

Incremental Revenue

Is the additional revenue earned from choosing an alternative.

Opportunity Cost

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

Shutdown Point

It is computed by dividing the difference between fixed costs and shutdown costs by the CM ratio. Shutdown Point = Fixed Costs - Shutdown Costs/ CM Ratio

Shutdown Point

It is the point where the loss of continuing business operations is equal to the loss from temporarily discontinuing business operations.

Spilt-Off Point

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

Decision Making

One of the vital roles of managers

Incremental Costs

Refer to additional costs that would be incurred as an effect of choosing an alternative.

Sunk Costs

Result from past decisions that cannot anymore be changed. They are never relevant.

Incremental Cost

The additional cost that has to be incurred as a result of choosing one alternative over another

Incremental Profit

The additional profit that will be earned as a result of choosing one alternative over another net of incremental costs. This is computed as incremental revenue - incremental cost

Incremental Revenue

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

Opportunity Cost

The benefit foregone as a results of rejecting one opportunity in favor of another opportunity. It is a relevant cost

Incremental Profit

The difference between incremental revenue and incremental cost.

Implementation of the Chosen Alternative

The fifth step of decision making.

Evaluating the Results

The final step of decision making. Results are being evaluated to identify if the expected outcome was achieved.

Problem Definition

The first definition of decision-making. To identify the problem and thoroughly analyze it.

Choosing the Best Alternative

The fourth step of decision making, it is when the advantages and disadvantages of each potential solution must be identified, even seek additional information if needed, and compare each alternative from the other. It also involves selecting the alternative that meets the criteria best at the least cost

Out-of-pocket Cost

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

Split-Off Point

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

Identification of Alternatives

The third step of decision making, being able to properly define the problem and identify the criteria. There must at least be two alternatives as a solution to the problemm.

Common Fixed Cost

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. This is considered as an unavoidable cost, thus, irrelevant cost.

Direct Fixed Cost

This is a fixed cost directly traceable to a business segment. This cost would be eliminated if a business segment is discontinued. This is considered as an avoidable cost, thus, relevant cost

Sunk Cost

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

Joint Cost

This refers to all manufacturing costs incurred in the production of joint products. This is an irrelevant cost in deciding whether to sell as is or process further a joint product

Bottleneck

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

Further Processing Cost

This refers to the cost incurred if a joint product is processed further into another final product after split-off point

Unavoidable Cost

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

Joint Product

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

Joint Products

Two or more products produced from a common input

Total Approach

Under this approach, all costs and benefits are included in the computation to identify which alternative is the best.

Differential Approach

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

Total Approach

Under this approach, revenue and costs of both situations are compared whether relevant or irrelevant.

Setting the Criteria

When it comes to this step of decision making, organizational goals such as profit maximization, cost minimization and the optimization of the organization's resources, as well as the corporate culture should be taken into consideration as to which would be the basis for judgement in choosing an alternative.

Shutdown Point

Which is also referred as the indifference point, should be identified first.

Shutdown Costs

Which may include security and maintenance of the facilities and other unavoidable costs