WEER 10
RELEVANT COSTING
What makes a costrelevant
1 It differsbetween alternatives
2 It relates to thefuture
Irrelevantitems
chunkcosts
Allocatedfixedcosts
Costsidenticalunderbothoptions
Typical BuinessDecisions
1 SpecialOrders
Accept if incrementalrevenue incremental cost
If at full capacity include opportunityoflostregularsales
2 Keep or Drop a Product clegment
Drop if Available costsavings lost contribution margin
Alsoconsider
Impactonotherproducts
Alternative use
offreedspace machines
3 Make or Buy
Make when Costs to make purchaseprice
Cost tomakeinclude
All variablecosts
Avoidablefixedcosts
Opportunitycost
ofusingresources
4 Sell or ProcessFurther
Process
further if Incremental revenue incrementalprocessingcost
Jointcosts always irrelevant
, 5 Scarce Resource allocation
Rank products
by
1 Contribution marginper unit of constrained resource
2 Produce in thatorder untilresource is exhausted
6 JointProducts
Jointcostsareirrelevantbecause theydo not changeaftersplit off
Decisiondependsonlyon incremental
analysis
RELEVANT COSTING
What makes a costrelevant
1 It differsbetween alternatives
2 It relates to thefuture
Irrelevantitems
chunkcosts
Allocatedfixedcosts
Costsidenticalunderbothoptions
Typical BuinessDecisions
1 SpecialOrders
Accept if incrementalrevenue incremental cost
If at full capacity include opportunityoflostregularsales
2 Keep or Drop a Product clegment
Drop if Available costsavings lost contribution margin
Alsoconsider
Impactonotherproducts
Alternative use
offreedspace machines
3 Make or Buy
Make when Costs to make purchaseprice
Cost tomakeinclude
All variablecosts
Avoidablefixedcosts
Opportunitycost
ofusingresources
4 Sell or ProcessFurther
Process
further if Incremental revenue incrementalprocessingcost
Jointcosts always irrelevant
, 5 Scarce Resource allocation
Rank products
by
1 Contribution marginper unit of constrained resource
2 Produce in thatorder untilresource is exhausted
6 JointProducts
Jointcostsareirrelevantbecause theydo not changeaftersplit off
Decisiondependsonlyon incremental
analysis
