RELEVANT COSTING
RELEVANT COSTING
Differential cost analysis, analyses business situation based on relevant information.
DIFFERENT DIFFERENTIAL COST DECISIONS
- Make or Buy Decisions
- Adding/Dropping Products/Segments
- Sell Now or Process Further
- Special Sales Pricing
- Utilization of Scarce Resources
- Shutdown or Continue Operations
MAKE OR BUY (OUTSOURCING) DECISIONS
Variable cost - costs that change as the quantity of the good or service that a business produces changes.
Avoidable fixed cost - costs that change as the quantity of the good or service that a business produces changes.
Decision Guide: Choose the alternative with the lower cost option.
ADDING OR DROPPING PRODUCT
LINES/SEGMENTS
Decision Guide:
- Without alternative: Add/Continue if segment margin is positive
- With alternative: Add/Continue if positive segment margin is greater than the alternative income
SELL NOW OR PROCESS FURTHER
Decision Guideline:
- Incremental loss : Sell at split-off
- Incremental Profit:
- Without alternative use: Continue if there is incremental profit
- With alternative use: Continue if incremental profit is greater than alternative income
SPECIAL SALES PRICING
Decision Guideline:
- Incremental loss: Reject special order
- Incremental Profit:
- Without alternative use: Continue if there is incremental profit
- With alternative use: Continue if incremental profit is greater than alternative income.
UTILIZATION OF SCARCE RESOURCES
Decision Guide:
- Rank 1 with unlimited demand: Allocate all resource to number 1.
- Rank 1 with limited demand: Allocate all products 1 by 1 based on ranking.
SHUT DOWN OR CONTINUE OPERATIONS
SHUT DOWN OR CONTINUE OPERATIONS