Relevant cost is a term associated withÂ management and cost accountingÂ which expresses the costs which are avoidable but are suffered while taking managerial decisions. The main idea of relevant cost is generally utilized to do away with the irrelevant data which can make the whole decision-making procedure more complex. For instance, relevant cost can be used for ascertaining whether to keep the business running or sell it off. You can check out manuals as relevant cost for decision making homework answers for further details.
What is the concept of relevant cost?
A relevant cost is an expense which solely corresponds to definite management oriented decisions, that is likely to alter in the long run as a consequence of that conclusion. The relevant cost topic is very much vital for removing extraneous and unnecessary information from a problem-resolving process.
Besides by striking off the irrelevant cost factors the management committee is interrupted from aiming at those factors which may otherwise mistakenly impact the decisions.
These concepts are just pertinent to managementâ€™s accounting functions; they are not helpful in the case of financial accounting, as no such decisions are associated with the presentation of financial reports.
Practical life example
Relevant cost for decision making homework answers is sought by most students as they find the concept somewhat vague and difficult to grasp. To give a preliminary idea of the concept I am quoting a real life example of the matter.
Suppose, for instance; a passenger goes to the airport counter to buy a flight ticket that is expected to take off in about 15 minutes. The airline’s company must take into account the relevant costs for decision making in relation to the price of the ticket. Nearly all the expenses associated with taking up that one extra passenger has virtually been sustained, including fuel charges, airport entry fees and the emoluments and remuneration of all the cabin crews and employees.
As those expenses have already accrued to the airline company,Â those costs are absolutely irrelevant and sometimes referred to as Sunk Costs. The sole relevant cost and which is the extra cost is to board the passengerâ€™s baggage, and the meal served to him or her on board. This is why the company makes the pricing decision of the extra ticket issued, based on solely some small-scale additional expenses.
Decisions about the business entityâ€™s future
While getting relevant cost for decision making homework answers, one would notice that whether to shut down a running business unit or to continue operations, as usual, is one of the most crucial decisions taken by managers. Relevant costs form the foundation for these conclusions and decisions taken by the company.
Let us assume, for instance, a line of sports goods retailing outlet comprehends shutting down a collection of stores serving the outdoor sportswear and merchandise market. Here the relevant costs are the charges which are capable of being removed after the shutting down of the chain, and also the earnings foregone when the outlets close.
If the charges to be removed are higher than the earnings foregone, then the chain of retail stores must stop operations immediately.
Relevance in Make or Buy decisions
Make or buy dilemmas are sometimes a concern for businesses that assemble small parts to manufacture new finished goods. To cite an example, say a television making company is contemplating to hire an external vendor to assemble and manufacture some LED TV sets that are consequently finished completely by incorporating wires and stands. The relevant costs in these circumstances are the variable costs sustained by the TV manufacturer to provide the stands and wires plus the payment made to the external vendor.
Only when the external vendor renders the service at a cost below that, then only the TV manufacturer considers outsourcing the job to externals. Many a times studentsâ€™ problems are based on make-buy decisions, and relevant cost for decision making homework answers are sought by them from experts.
Executing an exclusive order from customer
When a client or customer places an order request at the closing of the month, and the previous turnover has by that time encrusted the entire fixed overheads of the month, then an exclusive order is said to be placed. If the customer wants to enquire about the price payable for such a special order, the managers just take into account the excess variable cost directly attributable to the execution of the special order and accordingly quote the price to the client explicitly considering the variable material and labor charges.
Factory rent, indirect expenses, administration overheads and similar fixed charges are not at all relevant, as those are sunk costs for which the entity has already made payment, and it has nothing to do with the special order consequent to the incurrence of those expenses.
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Classification of relevant costs
There are basically two major types of relevant cost which are as follows:-
Future cost:On the basis of the decisions taken certain costs are to be sustained in the long run. This type of cost that is to be incurred in the future is considered as future costs. In case the costs are not altered in the future then they are presumed to be irrelevant or sunk costs.
Opportunity CostÂ – Opportunity costs are the principal charges and are utilized in calculating cost benefit examination of an assignment. Although those expenses are not registered in the books of accounts but are considered in the process of decision-making by calculating the cash outlays and the deriving results.
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