1
COST AND MANAGEMENT ACCOUNTING
Lecture 5
Contribution analysis and its application to short-
term decision making – Relevant Costing
Decision Making
Decision making.
Marginal costing is a costing technique where variable costs and fixed costs
are seperated. Marginal costing provides suitable information for short run
decision making and also helps management to decide on pricing policy.
Decision making is concerned with the future and involves a choice
between alternatives.
Marginal costing can be applied to a variety of decisions;
- Decision making in the face of a limiting factor.
- Make or buy decisions
- Accepting or rejecting an order
, 2
Decision Making
Managers often use some variation of the Five-Step Decision-Making
Process.
Step 1: Step 2: Step 3: Step 4: Step 5:
Make
Obtain predictions Choose an Implement Evaluate
Information about future alternative the performan
costs decision ce
Feedback
RELEVANT COSTING
Relevant information has two characteristics:
- It occurs in the future
- It differs among the alternative courses of action
Relavant costs – future cash flows arising as a direct consequence of a
decision.
- The decision concerns the future or a decision making process
always involve a prediction or forecast, thus nothing can be done
to alter the past.
- Relevant costs are future costs
- Relevant costs are cash flows
, 3
RELEVANT COSTING
The relevant cost are those cost that will change as a result of the decision:
e.g of Relevant costs
Avoidable cost
Incremental cost
Opportunity cost – best alternative foregone
e.g of non-relevant costs
Sunk cost or past cost
Committed cost
Non incremental cost
RELEVANT COSTING
Decision making should be based on relevant costs.
(a) Relevant costs are future costs. A decision is about the future and it
cannot alter what has been done already. Costs that have been incurred
in the past are totally irrelevant to any decision that is being made
“now”. Such costs are past costs or sunk costs.
A sunk cost is any cost which has already been incurred. Clearly this
cannot be affected by any decision to be made. Therefore, all sunk costs
should be excluded from the decision making process.
(b) Relevant costs are cash flows. Only cash flow information is required.
This means that costs or charges which do not reflect additional cash
COST AND MANAGEMENT ACCOUNTING
Lecture 5
Contribution analysis and its application to short-
term decision making – Relevant Costing
Decision Making
Decision making.
Marginal costing is a costing technique where variable costs and fixed costs
are seperated. Marginal costing provides suitable information for short run
decision making and also helps management to decide on pricing policy.
Decision making is concerned with the future and involves a choice
between alternatives.
Marginal costing can be applied to a variety of decisions;
- Decision making in the face of a limiting factor.
- Make or buy decisions
- Accepting or rejecting an order
, 2
Decision Making
Managers often use some variation of the Five-Step Decision-Making
Process.
Step 1: Step 2: Step 3: Step 4: Step 5:
Make
Obtain predictions Choose an Implement Evaluate
Information about future alternative the performan
costs decision ce
Feedback
RELEVANT COSTING
Relevant information has two characteristics:
- It occurs in the future
- It differs among the alternative courses of action
Relavant costs – future cash flows arising as a direct consequence of a
decision.
- The decision concerns the future or a decision making process
always involve a prediction or forecast, thus nothing can be done
to alter the past.
- Relevant costs are future costs
- Relevant costs are cash flows
, 3
RELEVANT COSTING
The relevant cost are those cost that will change as a result of the decision:
e.g of Relevant costs
Avoidable cost
Incremental cost
Opportunity cost – best alternative foregone
e.g of non-relevant costs
Sunk cost or past cost
Committed cost
Non incremental cost
RELEVANT COSTING
Decision making should be based on relevant costs.
(a) Relevant costs are future costs. A decision is about the future and it
cannot alter what has been done already. Costs that have been incurred
in the past are totally irrelevant to any decision that is being made
“now”. Such costs are past costs or sunk costs.
A sunk cost is any cost which has already been incurred. Clearly this
cannot be affected by any decision to be made. Therefore, all sunk costs
should be excluded from the decision making process.
(b) Relevant costs are cash flows. Only cash flow information is required.
This means that costs or charges which do not reflect additional cash
