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Relevant Costing
- Opportunity Cost
- Benefit foregone by choosing one option instead
of another. This normally includes
contribution/profit lost
- Benefit foregone by choosing one option instead
of another. This normally includes
contribution/profit lost
- Make or Buy (Outsourcing)
- The relevant costs of the decision are the differential costs between
making and buying
- 1) Calculate total saving by making in-house 2) Calculate total Attributable
Fixed Cost by making in house 3) Calculate the Net Cost/Saving and make
decision based on this
- 1) Calculate total saving by making in-house 2) Calculate total Attributable
Fixed Cost by making in house 3) Calculate the Net Cost/Saving and make
decision based on this
- Qualitative Factors
- Quality of bought in product, Reliability of supplier
Possibility of becoming dependent on supplier,
Likelihood of future price increases, How to use
spare capacity, Confidentiality issues
- Quality of bought in product, Reliability of supplier
Possibility of becoming dependent on supplier,
Likelihood of future price increases, How to use
spare capacity, Confidentiality issues
- The relevant costs of the decision are the differential costs between
making and buying
- Shut Down
- Qualitative Factors
- Impact on employee morale, Signal given to competitors,
Customer loss of confidence, Damage to suppliers’ business
- Impact on employee morale, Signal given to competitors,
Customer loss of confidence, Damage to suppliers’ business
- Relevant Cash Flows
- Lost contribution, Savings of fixed
costs, Penalties and payments,
Reorganisation costs, Redundancy
Costs, Annual operating costs,
Non-current assets to sell
- Lost contribution, Savings of fixed
costs, Penalties and payments,
Reorganisation costs, Redundancy
Costs, Annual operating costs,
Non-current assets to sell
- Qualitative Factors
- Minimum Economic Bid Pricing
- The minimum economic bid price of an order is simply the minimum price
which would give a break-even situation
- The minimum economic bid price is a starting price on
which to base a selling price or profit mark up.
- The minimum economic bid price of an order is simply the minimum price
which would give a break-even situation
- Materials
- Not in inventories - current replacement value
- In inventories held
- No use for them - current resale values if any value
- In continual use - current replacement value
- Scarce (cannot be replaced) - opportunity cost
- No use for them - current resale values if any value
- Not in inventories - current replacement value
- Labour
- Spare Capacity - no cost
- Full Capacity
- Hire more staff
- Current rate
of pay or cost
of hiring
- Current rate
of pay or cost
of hiring
- Cannot hire more staff
- Variable
cost & lost
contribution
- Variable
cost & lost
contribution
- Hire more staff
- Spare Capacity - no cost
- Sunk Costs
- a past (historical) cost which is not directly
relevant in decision making
- a past (historical) cost which is not directly
relevant in decision making
- Committed Costs
- a future cost which
cannot be recouped
- a future cost which
cannot be recouped
- Costs and revenues are relevant if they are
future, incremental and cash flows. Relevant
costs also include opportunity costs
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