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    Relevant Costing

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    REGI
    This document provides an overview of relevant costing concepts and their application to short-term and long-term decision making. It defines relevant costs as future cash flows that differ between options. It discusses relevant costing methods, types of decisions, and how to measure costs for short-term versus long-term decisions. For short-term decisions, it focuses on identifying relevant variable and fixed costs. For long-term decisions, it recommends using capital budgeting techniques like net present value. The document also lists qualitative factors to consider in addition to quantitative costs.

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    Relevant Costing

    Uploaded by

    REGI
    103 views13 pages
    This document provides an overview of relevant costing concepts and their application to short-term and long-term decision making. It defines relevant costs as future cash flows that differ between options. It discusses relevant costing methods, types of decisions, and how to measure costs for short-term versus long-term decisions. For short-term decisions, it focuses on identifying relevant variable and fixed costs. For long-term decisions, it recommends using capital budgeting techniques like net present value. The document also lists qualitative factors to consider in addition to quantitative costs.

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    Relevant costing notes

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    This document provides an overview of relevant costing concepts and their application to short-term and long-term decision making. It defines relevant costs as future cash flows that differ between options. It discusses relevant costing methods, types of decisions, and how to measure costs for short-term versus long-term decisions. For short-term decisions, it focuses on identifying relevant variable and fixed costs. For long-term decisions, it recommends using capital budgeting techniques like net present value. The document also lists qualitative factors to consider in addition to quantitative costs.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    103 views13 pages

    Relevant Costing

    Uploaded by

    REGI
    This document provides an overview of relevant costing concepts and their application to short-term and long-term decision making. It defines relevant costs as future cash flows that differ between options. It discusses relevant costing methods, types of decisions, and how to measure costs for short-term versus long-term decisions. For short-term decisions, it focuses on identifying relevant variable and fixed costs. For long-term decisions, it recommends using capital budgeting techniques like net present value. The document also lists qualitative factors to consider in addition to quantitative costs.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 13

    RELEVANT COSTING

    CHAPTER 9

    Presented by: Nicole Lieman


    FNB 135

    Relevant Costing: revision of key concepts

    Remember the definition:

    Future cash flows that differ between 2


    options

    Other definitions
    Irrelevant
    costs

    Opportunity
    costs

    The next best


    alternative given
    up
    Constraint

    Common
    costs
    Unique costs

    Sunk costs

    Committed
    costs

    Relevant Costing: revision of key concepts

    Two methods

    Show all the relevant costs for the 2 options (2


    columns)
    Show only the incremental cash flows (1 column)

    Consider only relevant cash flows


    Always consider both qualitative and
    quantitative factors
    Types of decisions:

    Special orders
    Outsourcing (make or buy decisions)
    Replacement of equipment
    Discontinuation decisions (products or divisions)

    Timing of decision

    How should costs be measured for a range of nonroutine short-term and long-term decisions?

    What is the difference?

    Short-term Decision

    Long-term Decision

    Once-off orders, make or buy decisions


    (outsourcing), discontinuation decisions,
    and replacement of equipment. etc

    Whether to make a long-term strategic


    move ,set a selling price, introduce a new
    product or service, discontinuance of a
    product, purchase infrastructure, outsourcing

    Identify relevant costs, sunk costs,


    opportunity costs/incomes, incremental
    costs and avoidable costs in a scenario
    related to this decision. (Remember the
    irrelevance of book values)

    Use capital budgeting (NPV), a multi period


    approach.

    Selling Price decisions (Short-term)

    Costs related to the decision may be different


    as we view these costs from a long-term
    perspective.
    Selling Price decisions (Long-term)

    Relevant incremental cost + a mark-up.

    Full costs + company return (WACC)

    Detailed knowledge
    of relevant costing
    is very important

    NPV and capital


    budgeting knowledge is
    very important

    Relevant Labour costs S/T

    Capacity constraints

    How can we get additional labour:


    Overtime?

    More expensive?
    New staff? Training
    Reduce production of something else

    Now have an opportunity cost + relevant cost


    Remember: will always go with the cheapest
    option to source more labour

    Salaries/wages
    Partial capacity constraint

    Cost of available capacity (eg usual labour rate)


    Cost of overtime when need more capacity)

    Example 1 labour costs

    Relevant material costs: S/T

    No alternative use

    Materials used regularly in production

    Sitting idle: no cost

    What about the original


    purchase price?

    Irrespective of how much is on hand, will need to


    be replaced: replacement cost

    Have an alternative use

    Used on another product, thus if use on order


    cannot produce other product: opportunity cost
    Could have been scrapped for a small income:
    opportunity cost
    Would have had to be removed at a cost:
    opportunity saving

    Example 2 materials

    Short term vs long term

    Variable costs / Fixed costs / Mixed costs


    Long term:

    more costs can be changed,


    thus more costs will be relevant

    Approach:

    Consider all costs that would be relevant in


    each period
    NPV discounted at required return
    Required return depends on what is being
    analysed:
    Company

    WACC or divisional return

    Example 3 S/T vs L/T

    Consider
    Head office allocated costs
    Free space in factory
    Lost or increased sales in another product
    By-products
    Redundancy costs
    Book values
    Depreciation allocation of past costs
    Idle time
    Alternative use for materials
    Transfer pricing
    Materials (historic cost/replacement cost/MV/NRV/opp cost)
    Labour (Permanent salaried/Temporary hourly/No capacity,
    opp cost

    Qualitative factors to
    consider

    Decline in employee morale

    Trade union reaction

    Competitor reaction

    Price elasticity

    Availability of capacity, materials, labour

    Better more lucrative alternatives available

    Effect on environment / public outcry

    Effect of low price on other customers

    Price set now, when renegotiate later, bound to this

    More qualitative factors to consider:

    Repeat order?

    Technical expertise

    Timing of cash flows, financing

    Reliability and reputation of customers

    Tax consequences / allowances

    Reliability of forecasts, information

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