Relevant Costs

Relevant Costs

1. they are an accounting term that only relates to a specific management decision and that will change in the future As a result of that decision. They try to determine the objective cost of a business decision.

   • An objective measure of the cost of a decision commercial is the scope of cash outflows that will result from its implementation. The cost relevant focuses only on that and ignores others costs that do not affect cash flows futures.
     • This concept is used to delete unnecessary data that could complicate a process particular of making decisions. As an example, the relevant cost is used for determine if a unit of business must be sold or keep.
   • features
     • Features: important of the relevant costs are "occurrence in the future »and« different for different alternatives". For an item of cost is relevant, must be present Both conditions.
       • The relevant and irrelevant costs are mutually exclusive A cost element in a situation not it can be both a relevant and an irrelevant cost at the same time. The underlying principles of Relevant costs are quite simple. Probably can relate to personal experiences that They involve financial decisions.
   • Types of relevant costs
     • Future cash flows A cash expense where will incur in the future as result of a decision is A relevant cost.
       • Avoidable costs These costs are relevant only to a decision that it can be avoided if the decision.
         • Opportunity costs Cash income that will be sacrificed as a result of a particular management decision is a cost relevant.
           • Incremental cost When considered different alternatives, the relevant cost is the incremental cost or differential between the different alternatives that are considered.
   • Example
     • Decide between making or buying The decision to make instead of buying is often a problem for a company that It requires component parts to create a finished product. For example, a furniture manufacturer is considering a external supplier to assemble and dye wooden cabinets, to which will then end up adding wooden handles and others details. The relevant costs are the variable costs incurred by the manufacturer to make the wooden cabinets and the price paid to the external provider. If the provider can provide the component at a lower cost, the furniture manufacturer will subcontract the work.