A Relevant and irrelevant costs
1 Distinguish between relevant and irrelevant costs is important for business decision-making , as irrelevant costs are not to be considered in the decision-making process.
2 Relevant costs a Relevant costs are the expected future costs that must be considered when making a decision. b There are three major types of relevant costs
The opportunity cost of making a decision is the highest-valued alternative forgone.
Incremental costs are the additional costs incurred when a certain action is taken.
Avoidable costs are the costs which can be reduced or avoided when a certain action is taken.
3 Irrelevant costs a b
Irrelevant costs are the costs that do not have to be considered when making a decision.
There are two major types of irrelevant costs:
Sunk costs are the costs that have been incurred and cannot be recovered.
Unavoidable costs are the costs which have to be incurred regardless of what action is taken.
4 Determine the type of costs in the following situations: a A company plans to outsource its production activities. However, the company cannot lay off its factory workers due to contractual obligations. b
The wages of factory workers are an unavoidable cost.
A company plans to outsource some of its production activities. The part-time workers in its factory can be laid off without compensation after these production activities are outsourced.
The wages of part-time workers are an avoidable cost.
c d
A company purchased a motor vehicle five years ago for $50,000.
This purchases cost of $50,000 is a sunk cost.
A machine bought 10 years ago for $50,000 can now be sold for $10,000.
The $10,000 is the opportunity cost of keeping this machine. e A company incurs factory rental of $100,000 per month. After expanding the production capacity, factory rental will increase by $20,000 per month.
The $20,000 is the incremental cost of expanding the production capacity.

B Business decision-making
5 Management often needs to make a decision in the following situation: a b
Accept or reject an order at a special price
Hire, make or buy c d e
Sell or process further
Retain or replace equipment
Eliminate or retain an unprofitable segment
6 When making a choice, we should always compare the effect on net profit or total manufacturing costs.
7 When there is a limiting factor, you need to consider the opportunity costs associated with it.
8 The historical cost and net book value of an asset is usually irrelevant, while the disposal value of an asset is usually relevant.
9 When making a decision, besides considering the various costs, we should also consider the qualitative factors.
C Joint products
10 Joint products refer to two or more products produced simultaneously from the same raw material by a common production process.
11 Joint costs are the costs of a single production process that simultaneously yields multiple products.
12 Joint costs are irrelevant in incremental analysis as they are the same whether there is further processing or not.