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Relevant Costing

The document discusses relevant costing for decision making, noting that variable costs are usually relevant while fixed costs are usually irrelevant unless avoidable. It defines relevant costs as differential, avoidable, or opportunity costs that differ among alternatives. The best alternative maximizes income or minimizes loss by only considering relevant factors like variable costs that differ between options.

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Prances Obias
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10 views1 page

Relevant Costing

The document discusses relevant costing for decision making, noting that variable costs are usually relevant while fixed costs are usually irrelevant unless avoidable. It defines relevant costs as differential, avoidable, or opportunity costs that differ among alternatives. The best alternative maximizes income or minimizes loss by only considering relevant factors like variable costs that differ between options.

Uploaded by

Prances Obias
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Relevant costing

Future costs that are different among alternatives Shut down point

Basic Rule: Variable costs are usually relevant in decision making.


While fixed cost are usually Irrelevant unless they
become avoidable · expected sales shutdown point-continue
· expected sales shutdown point-shutdown
Relevant · expected sales-shutdown point: continue/shutdown
Differential cost -present in one alternative, absent in whole/part in another alternative
Avoidable cost -can be eliminated in whole or in part
Opportunity cost -contribution to income that is forgone(lost)when action is taken over.

Irrelevant hypothetical Market value =(Final Sales Value-Additionsl processing cost)


Sunk just (or past cost)
Future cost that do not differ between or among the alternatives

*Only relevant factors should be considered in evaluating the alternatives

*As a general rule, the best alternative is the one that will give organization the highest income (or lowest loss)

Short-term Decision making


Definition: Decision Making ~ choosing from a least 2 option/alternative
Objective: Maximize Profit

Linear programming
can handle multiple constraints
use to achieve best outcome maximizing profit/lowest cost

Accept: If KLM has excess capacity Steps in formulating Linear program


Reject: If KLM is at full capacity 1. Identifying decision variable
2. Express the objective and constraint functions
Objective Function (the unknowns used to construct OF and CF)
Maximize Z = xA + xB Contribution Margin (CM) = Z Sample of Graphic Method

company was or cannot be totally shutdown Non-negativity constrant


only segment of the company A, B > 0
>Direct/traceable fed(Avadable)-Relevant Constraint Function (limit the values of the variables)
> Indirect/common fixed(unavoidable)-irrelevant xA + xB < limitation/available

Segment Margin Methods for solving linear programming

Graphical method - limited to problems with ONLY two variables


Important or correct amount to lookup
Simplex method - even when there are more than a variables

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