Week 3: Cost Behavior, Decision Making,
Quality - Discussions
Relevant Costs (graded)
Discuss Relevant Costs. Why are historical costs irrelevant?
Responses
Response
Relevant
Costs
Author
Instructor Louviere
Date/Time
9/10/2011 3:30:58 PM
Class:
After answering the question posed above, ask yourself what makes a cost "irrelevant"?
RE:
Relevant
Costs
James Kofoed
9/17/2011 3:51:31 PM
Historical costs are irrelevant because they do not occur in the future and there
are not alternative outcomes. Relevant costs and revenues are considered
relevant because they are based on what will be. Costs that have already occured
are sunk.
Jim
RE:
Relevant
Costs
Hau Pham
9/15/2011 11:39:54 PM
Relevant Costs are the costs that based on decision specific. These costs could be relevant to
one situation, but doesn’t mean it would be applied to other situation. Historical costs are
irrelevant because it’s simply data from a specific event which has nothing to do or apply with
current event
RE:
Relevant
Costs
Daniel Arriagada
9/14/2011 6:00:43 PM
To me an irrelevant cost is a cost that it will not affect the decision making. So
if is not relevant enough to make a decision than it is an irrelevant cost.
Ex. A company spent x amount of money on a truck to make special deliveries,
the truck was bought on credit and now they have to pay and still have to pay
monthly payment. The company does not use the truck anymore because it was
not as successful as they though it would be, so now those truck costs are
irrelevant.
RE:
Relevant Frank Martinez
Costs
9/14/2011 11:11:52 PM
That is a good example Daniel, in this case it reminds me of how
companies and businesses have to stop and really think of their future
decisions. Before even making a single that might be (in this case)
irrelevant. Decision making is not always as simple as it sounds, to start
off companies have to have the right people for those types of positions,
so that free mistakes do not occur. I can't tell you how obvious an
irrelevant decision can occur many times and sometimes businesses do
not learn their lesson. Sometimes companies have the wrong system in
which they do business, and for me that already is starting with their left
foot instead of progressing. Just to show you how important it is to have
the right people for those types of decisions. In your example, if the
correct people would have been in that position and power, they would
foresee the problem and situation, and kind of basically see that in the
future this problem could have occurred.
RE:
Relevant Brandon Green
Costs
9/17/2011 12:22:39 PM
I generally agree with the idea that an irrelevant cost is one that
will not affect decision making. Trouble is even though it may
be accurate it's also very vague. Take Daniel's truck cost
example for instance. In Daniel's example the truck cost are
irrelevant because...the company still has to make payments? or
because the company doesn't use the truck anymore? In any
case Daniel deems the truck cost irrelevant in the example
given. However, the cost of the truck may also be the same
reason the company can't or won't buy something else or may
be partly what the company will use in making a decision to
determine what to try and sell or use the vehicle for instead of
delivery. As a result irrelevant cost seems to be an issue that has
to be taken on a case to case basis and may very well never
hold true as being an absolute irrelevant cost.
RE:
Relevant Frank Martinez
Costs
9/17/2011 11:27:33
PM
That is true Brandon, and I agree with what you said as
well. Because it is true, if a company makes a purchase
on a truck for delivery, and business doesn't run as
smoothly as they expected it to be, then chances are
they would have to either sell it to try to at least make
some profit out of it, or look for another excuse to keep
the truck. Just as you mentioned try to use it's services
for something else. I have seen this occur in many
different businesses as well. One good example that I
can remember of is this one; back in my home town a
guy who owned a couple farm fields bought some land
and made a franchise taco bell. After about 2-3 years
later business wasn't running as smoothly as he hoped
it would, so he closed the franchise, and purchased a
different one. Now it is a donut shop. He was able to
make a different type of business with that same
building.
RE:
Relevant Instructor Louviere
Costs
9/18/2011 12:45:27
PM
Excellent discussion!
Another question: How is the decision
making process done at your work?
RE:
Relevant Brandon Green
Costs
9/18/2011 5:52:11
PM
It depended on what part of the work
force you were a part of a lot of the
time. For instance, office personnel
and related responsibilities or yard
(laborer) personnel and related
responsibilities. In the yard it was
often identify the problem, implement
the solution or make do as best you
could, and go about your business. In
many cases this was possible in the
yard although there were instances
where a "specialist" or someone who
had more time than those in
production were needed to come look
at the problem which added a "gather
information" aspect to things. In the
office it was a little more
complicated, but not always. It was
often identify the problem, gather
information, consider at least one
alternative, implement the solution,
and identify effectiveness of the
solution. If the solution proved good
enough to get the job done we'd make
a note of it and often repeat the
process for similar items in the future.
In the yard or field great effort was
made to expedite the process and skip
as many non essential items as
possible for the sake of production. In
the office more effort was made to
thoroughly analyze an issue being that
the office is kind of where a lot of
things started. So, if it got done right
in the office chances are there was
much less of a chance that things
would go wrong in the field, and if
they did it was often much easier to
narrow it down to issues in the field
and not so much having originated
from somewhere in the office.
RE:
Relevant James Kofoed
Costs
9/18/2011 8:27:23
PM
I work in a hospital and balancing
efficiency with the regulations
required for national accreditation can
be a difficult task. The facility is new
and all of the nuances involving
rotating patients through the operation
cycle to minimize check-in and turnaround times has not been
perfected. Directors work with their
staff and determine areas where
improvements can be made. They
then turn in a work request form if it
is something simple. If it is
something more complex (ie.
reconfiguring surgical area biohazardous waste removal.) it is
brought to attention at the bi-weekly
management meeting for input from
other directors. The necessity of the
task is discussed and a committee is
usually established with directors of
the departments that the task effects.
For example, there were problems
with the staging location of
biohazardous waste and soiled linen
bins. Due to lack of storage space in
the sterile corridor the bins were
being left in the hallway. The bins
had to move for code reasons and for
aesthetic reasons. Solutions provided
by the Director of
Surgical Services included converting
a staff restroom to storage
or relocating the anesthesia
workroom. Both solutions were less
than desirable. By airing this problem
in the staff meeting a small committee
was formed which included the Dir of
Surgical Services, Chief Nursing
Officer, Dir of
Housekeeping/Infection Control and
the Dir of Facilities. Brainstorming
ideas across different divisions netted
a practical inexpensive solution by
melding different perspectives. Two
unused coat closets were eliminated
in a vestibule that was utilized only in
case of a fire. The vestibule was
accessible only to the surgical
department and opened outside 50
feet from the dumpster pad.
Quantitative cost analyses were
performed for each of the 3 possible
solutions. The solutions were
presented to the CFO and CEO.
Since this problem did not affect
revenue, remodeling costs were
compared and qualitative factors of
ease of use of space were considered.
The CEO and CFO signed off
dictated when to start. In all a
roughly $1,500 remodel(eliminated
Doctors' coat closet) help streamline
waste duty in the OR areas which has
helped our hospital perform more
cases per day.
The long and the short of it is:
Decisions start with directors.
Directors make proposals. Proposals
are analyzed and alternatives are
explored. Mutual agreement of
appropriate solution is obtained. The
CFO and CEO are consulted.
Changes are made.
Jim
Jim
RE:
Relevant
Costs
Richard Burger
9/14/2011 7:56:40 PM
Relevant costs are expected future costs that that differ among alternative
courses of action considered. Irrelevant costs are fixed, and do not change no
matter what deceision is made.
Rich
RE:
Relevant
Costs
Michael Coleman
9/14/2011 8:47:13 PM
As with relevant costs, irrelevant costs may be irrelevant for some situations but
relevant for others. Examples of irrelevant costs are fixed overheads, notional
costs, sunk costs and book values.
A managerial accounting term that represents a cost, either positive or negative,
that does not relate to a situation requiring management's decision.
RE:
Relevant
Costs
Elena Brechler
9/14/2011 4:56:11 PM
I think that things that make a cost irrelevant are if the cost is not recurring
and/or significant (high). If the cost is one that will be incurred on an ongoing
basis or periodically, then it is relevant to know about it and budget for it and if it
is a high cost, it is also relevant because it dented or will dent an existing budget.
RE:
Relevant
Costs
Ahmed Abdelrazig
9/13/2011 11:11:45 PM
What makes a cost irrelevant from my point of view is basically whether or not it
should matter or be considered in the future productivity of my team/workforce
or company as a whole. If a cost was relevant in the past that does not mean that
it will be the same today and tomorrow. Take if from a production managers'
perspective, if he/she had bought a piece of machinery in the past that was costeffective but as technology has progressed it is no longer considered top of the
line than the next purchase made to keep the company competitive and
productive shouldn’t consider how cost-effect that past machine was but should
instead consider the relevant cost that will be incurred towards productivity
levels of the future.
RE:
Relevant
Costs
Travis Carroll
9/13/2011 1:53:44 PM
When a cost or any expense does not affect the decision making process or are
not taken into consideration for such decision, then the cost is irrelevant for that
decision. For an e.g. the company is considering to buy a new machine and
wishes to replace the previous one, then the original cost at which the existing
machine was bought is irrelevant to this decision. The current market price and
current book value of the existing machine is required. We take another e.g.,
when we compute the free cash flow to the firm (not free cash flow to equity) for
any project, then the interest expense incurred on the loan taken for financing the
project is irrelevant costs. The interest expense is used to compute the discount
rate, and does not affect the free cash flow. Sunk costs are also considered as
irrelevant costs.
RE:
Relevant
Costs
Patricia Neal-Williams
9/12/2011 10:58:51 PM
Relevant costs are expected future costs. Relevant costs must occur in the
future- every decision deals with selecting a course of action based on its
expected future results and differamong the alternative courses of action- costs
and revenues that do not differ will not matter and, will have no bearing on the
decision being made
Historical costs are irrelevant because with historical costs they are past costs
that are therefore considered irrelevant to decision making. Past costs are also
called sunk costs because they are unavoidable and cannot be changed no matter
what action is taken.
What makes a cost irrelevant? For example, suppose you have two order
processing systems that have identical feature. One is priced half as much as the
other. The customer will pick the one that’s cheaper, right? Not necessarily.
Suppose the cheaper system has twice the downtime as the more expensive one.
That downtime could mean millions of dollars in lost business — making the
lower price a false economy.
The primary job of sales rep who’s selling the higher priced product is to
differentiate, and then assign a financial value — to the customer — that makes
the higher price completely irrelevant
RE:
Relevant
Costs
Tyrone Labad
9/11/2011 7:02:53 PM
Relevant costs as the name states are costs that are relevant to making a
particular decision. They are also considered future costs. Historical costs are
irrelevant to making decisions because they are past costs. Historical costs can
occur in the future but they cannot be changed that’s what makes them
irrelevant.
RE:
Relevant Stephanie McGrath
Costs
9/12/2011 3:00:46 PM
We have good definitions of what relevant costs are, so I won’t add anymore to that. In
the analysis of dropping a customer example on pages 402 & 403, historical costs
being irrelevant are also reviewed. In this analysis the managers are looking to answer
the questions of what the relevant revenues and costs are, and how they will affect the
operating income. Depreciation, rent, general-administration, and corporate-office
costs are irrelevant in this case because they are future costs that will not change as a
result of dropping this customer. In every situation management will need to consider
which costs are relevant to make good decisions (Horngren, Datar, Foster, Rajan, &
Ittner, 2009, Cost Accounting, page 402-403).
RE:
Relevant Instructor Louviere
Costs
9/13/2011 1:55:07 AM
Class:
What are the differences between linear and nonlinear cost functions? Give
an example of each type.
RE:
Relevant Michael Coleman
Costs
9/13/2011 6:42:05
PM
(Linear cost function) Cost function in which the graph of total costs versus
a single cost driver forms a straight line within the relevant range.
Situation where the relationship between variables is not directly
proportional. For example, a per unit cost may decrease as production
increases, because of economies of scale. The following diagram shows a
comparison between a linear and a nonlinear cost function.
Read more: http://www.answers.com/topic/nonlinearity#ixzz1XsmaqgvN
RE:
Relevant Freddy Rodriguez
Costs
9/14/2011 3:52:51
PM
When you graph linear equations it is in the form of a straight
line. When you graph a nonlinear equation it is in a form of a
curve at some point or at many points depending on the
complexity of the equation. A nonlinear equation has exponents
(something squared, cubed, etc.). The higher the exponent the
more curves there are in a nonlinear equation. For a linear
equation for example, the number of cookies you eat in a day
could have a direct impact on your weight as illustrated by a linear
equation. For a nonlinear equation, if you were analyzing the
division of cells under mitosis, a nonlinear, exponential equation
would fit the data better.
RE:
Relevant Dominique Fryer
Costs
9/14/2011 5:23:45
PM
This was a good explanation Freddy. It seems
like most of the time we deal with linear
equations when we are talking about costing
so far in this class. It is much more easy to
understand then the nonlinear equations. I
was trying to think of a way that costing can
make a nonlinear function and the only thing I
could think of would be if the material comes
in large quantities and there is extra that is
used to make more products. It would not cost
more for the material but the quantity of the
products would increase.
RE:
Relevant Daniel Arriagada
Costs
9/14/2011 6:55:47
PM
A linear cost function is a cost function in which the
graph of total costs versus the level of a single activity
related to that cost is a straight line within the relevant
range.
and example of a linear cost function is an electrician
charges $50 an hour with a initial fee of $100 so the
linear cost function will show the initial fee of $100
and any hour charge. It is a straight line representing
both the initial fee and any hour charge, so no matter
how many hours the electrician work this line will
always show the initial fee with the total hours worked.
RE:
Relevant Instructor Louviere
Costs
Class:
9/15/2011 2:04:32
AM
Another question: Outline the steps in the
decision process. Provide examples of each.
RE:
Relevant Daniel Arriagada
Costs
9/16/2011 7:06:08
PM
According to the book there is a fivestep in decision making process:
1.- identify the problem and
uncertainties. Ex. should a medical
clinic expand their business to another
town.
2.- obtain information. Ex. find out if
there are several medical offices
there.
3.- make predictions about the future.
Ex. based on the information above, a
manager can predict if the office
would be successful in the new town.
4.- make decisions by choosing
among alternatives. Ex. based on
calculated predictions on step 3 a
manager can compare with the other
medical offices in the new town and
make a decision.
5.- implement the decision, evaluate
performance, and learn. Ex. Manager
can evaluate the actual performance
after the decision is made. Managers
can learn from actual results,
managers can learn if expanding the
medical office to other town was a
successful or a failed.
RE:
Relevant Instructor Louviere
Costs
9/17/2011 4:19:38
AM
Good discussion!
Discuss potential problems
that should be avoided in
relevant-cost analysis.
RE:
Relevant James Kofoed
Costs
9/17/2011
10:09:37 PM
Our text advises that
there are two
problems managers
face when
performing relevantcost analyses. First,
it is wrong to assume
that all variable costs
are relevant.
Occasionally some
variable costs will
not be relevant such
as when a company
approaches another
to fill an emergency
order. (ie. their
normal vendor
couldn't come
through) In this
instance variable
sales costs may not
apply if no
additional marketing
costs were incurred
in securing the
order. Additionally,
fixed costs may not
be irrelevant if the
additional order
increases need for
capacity which
would increase fixed
costs (Horngren,
Datar, Foster, Rajan
& Ittner, p. 392)
The second problem
has to do with
confusing unitized
fixed irrelevant costs
and utilizing them in
the analysis by
mistaking that they
are variable costs.
Jim
RE:
Relevant Ahmed Abdelrazig
Costs
9/17/2011
9:48:35 PM
There are mainly 2
potential issues that
managers should
avoid in relevant
costs analysis, the
first is making false
assumptions like any
fixed cost
is irrelevant costs
and on the other end
of the spectrum,
assuming that the
variable costs are all
relevant costs. False
assumptions should
be avoided in
relevant cost
analysis and
managers should
focus more on totals
in regards to
revenues and costs
instead of unitary
costs and revenues.
Losing focus on total
amounts and
hammering into unit
amounts is another
potential problem
that should be
avoided.
RE:
Relevant Brandon Green
Costs
9/17/2011
12:39:07 PM
Good post. Step 2 in
particular caught my
attention reminding me of
something from a business
class which is finding out if
there is a market or demand
for what you want to do. In
relation to the example
Daniel gives finding out how
many medical offices are in
the area is a good item to
consider. The answer to that
alone would not be enough
for to make a decision on
though. For instance, even if
there are few offices they
may be more than adequately
serving the population
without need for additional
offices. In the event there are
many medical offices it's
possible there is a need or
demand for more.
Additionally, there may be
room for improvement so to
speak. For instance, you
could potentially poll a
sample of the population
asking if they think the
medical offices could be
better, why they could be
better, and then try to target
that gap. So, it would be
possible even though
facilities exist that they lack
in desirable features and such
the public may wish existed,
were different, and so on.
RE:
Relevant Deborah Kieffer
Costs
9/16/2011 8:49:48
PM
Step 1: Identify the problem and
uncertainties
Example: In an effort to reduce direct
and indirects costs associated with a
production line, a manager considers
a lean event to instill quality and
transformation initiatives.
Uncertainties in this example could be
the organization's receptiveness to
sweeping changes and perhaps
resource constraints in conducting the
lean event.
Step 2: Obtain information (historical
costs & other information)
Example: Managers request
production and financial analysts,
schedulers, workloaders, supply
technicians, etc., to provide historical
information regarding cost, schedule,
process, quality, and performance.
Managers can also investigate other
benchmark other similar processes
both within and outside the company
to find likely candidates for potential
transformation areas.
Step 3: Make Predictions About the
Future
Example: Using information
gathered in Step 2, managers can use
integrated product teams to develop
the current state and start to formulate
the desired end state of the
transformation. Risk and probability
discussion will likely occur at this
step along with some preliminary
estimations regarding how much this
lean event could cost.
Step 4: Make Decision by Choosing
Among Alternatives
Example: Several return on
investment scenarios would be
required to determine what potential
processes could be most easily
improved to gain the greatest benefit
in the least amount of downtime to
the line. Make or buy decisions
would certainly be considered as
reallocation of costs and restructure of
department to bring about the greatest
efficiencies.
Step 5: Implement the Decision,
Evaluate Performance, and Learn
Example: Process improvement
along the critical path would be
implemented along with establishing
effective metrics and communication
process to monitor progress and
performance. Adjustments made as
necessary. If successful, propagate
lessons learned and benchmarks to
other departments. Create new or
revise existing training resources to
reflect new outcome.
RE:
Relevant Travis Carroll
Costs
9/17/2011 4:54:51
AM
Linear cost function is a cost function in which the graph of total
costs against a single cost driver forms a straight line within the
relevant range.
The linear cost function is given by:- C (x) = mx + b where mx is
the variable, y-intercept, b represents the fixed cost.
For Example, An electrician charges a fee of $50 plus $25 per
hour. The linear cost function would be C (x) = 25x + 50
Nonlinear cost function is a cost function in which the graph of
total costs against a single cost driver does not form a straight line
within the relevant range. A nonlinear cost may be of the form
y = ax2 + bx + c (Quadratic equation)
RE:
Relevant Janet Knowlden
Costs
9/18/2011 9:08:49
AM
Travis, I remember these equations from
algebra class and hated having to figure it out
long hand, but that was before I found out that
Excel can do the calculations for you, as in the
case of the high-low vs. linear equation
problems we had. The Excel calculations were
more accurate than the textbook. I believe the
quadratic equation is in there as well. Trying
to remember the calculations can cause a
headache. I don't remember seeing the ones
you refer to in our text.
RE:
Relevant Instructor Louviere
Costs
9/18/2011
12:47:18 PM
Hi Class:
Good conversation! Another
question: Please share
your experiences with costing
methods decision making, learning
curves, and/or bottlenecks.
Relevant
Costs
Ellen LaChance
9/11/2011 8:48:34 AM
According to our textbook, relevant costs are expected future costs that differ among alternative courses of
action being considered. In order for a cost to be classified as relevant it must occur in the future, but not
all future costs are considered relevant. A relevant cost is a cost that will change with respect to a
particular decision being made. Relevant costs are the only cost items that are needed to consider when
analyzing decision alternatives. Relevant costs are also known as incremental or differential costs.
Historical costs are past costs that can be useful in predicting future costs but they are irrelevant when
making current decisions. Historical costs that have no impact on a future outcome or decision are
irrelevant and not considered in the decision making process. Examples of irrelevant or historical costs are
fixed overhead and sunk costs. Sunk costs are costs that were incurred in the past and were not used.
Relevant
Costs
Craig Bemis
9/11/2011 12:25:59 PM
A relevant cost is a cost that is specific to management's decision. A relevant cost
eliminates unnecessary data that could complicate the decision making process. They are
specific to what ever decision is being made at that time. So, in other words, a relevant
cost may be relevant in one decision and irrelevant in another. Relevant costs can help
management decide whether to sell or keep a product, purchase an item, or accept a
special order.
RE:
Relevant
Costs
Jason Hall
9/18/2011 9:35:03 PM
Many costs will be incurred whether one decision is made or another is. Since that cost will not
change due to the decision that is made it should not go into the decision making process. By
eliminating the costs that will not change or are irrelevant to a decision a manager will be able to
make a decision that is truly based on the impacts that decision will have without having
additional data adding confusion to what might happen if a choice is made to add or drop a
product or division.
Relevant
Cost
Kanchi Patel
9/11/2011 5:14:59 PM
Relevant costs are costs that change with respect to a particular decision. Sunk costs are
never relevant. Future costs may or may not be relevant. If the future costs are going to
be incurred regardless of the decision that is made, those costs are not relevant.
Committed costs are future costs that are not relevant. Even if the future costs are not
committed, if we anticipate incurring those costs regardless of the decision that we make,
those costs are not relevant. The only costs that are relevant are those that differ as
between the alternatives being considered. Including sunk costs in a decision can lead to
a poor choice. However, including future irrelevant costs generally will not lead to a poor
choice; it will only complicate the analysis. For example, if I am deciding whether to buy
a Toyota Camry or a Subaru Legacy, and if my auto insurance will be the same no matter
which car I buy, my consideration of insurance costs will not affect my decision,
although it will slightly complicate the analysis.
Historical
Costs
Dawn Baker
9/11/2011 5:53:58 PM
Historical costs are irrelevant to any decision making by management. These are costs that are in the past
and can not be changed regardless of the action taken. Historical costs are unchangeable and regardless of
the action or decision making that is performed by manegement, they aren't changed. An example of a
historical cost is a sunk cost, which is a cost that has already occured and can not be recovered.
RE:
Historical
Costs
Kanchi Patel
9/12/2011 6:50:17 PM
I agree with you Dawn. Historical cost method, over a period of time has been
subject to many criticisms, especially as it considers the acquisition cost of an
asset and does not recognize the current market value. Historical costs is only
interested in cost allocations and not in the value of an asset. While it tells the
user the acquisition cost of an asset and its depreciation in the following years, it
ignores the possibility that the current market value of that asset may be higher
or lower than it suggests.
Another main criticism of historical accounting method is its obvious flaws in
times of inflation. The validity of historic accounting rests on the assumption
that the currency in which transactions are recorded remains stable, i.e. its
purchasing power remains the same over a period of time. Another main point
with regards to inflation is rise in prices for an asset. An asset purchased at a
point in time may be expensive in future. The traditional accounting principles
record all assets at an original cost and continue to use these historic figures
throughout the asset's life, while economists make a more intelligible assumption
that money has a time-value attached to it. The economist's approach is broadly
embraced in the corporate finance model whose objective is centered on value
creation for the shareholders.
RE:
Historical Tyrone Labad
Costs
9/12/2011 7:19:06 PM
Well said Kanchi, I could not have explained it any better.
RE:
Historical Instructor Louviere
Costs
9/13/2011 1:56:05 AM
Class:
Another question: Name several approaches to estimating a cost
function.
RE:
Historical Lisa Marie Johnson
Costs
9/17/2011 6:27:53
PM
A common use of cost behavior information is the attempt
by management to predict the total production costs for
units to be manufactured in the upcoming month. There
are several methods used to estimate total product costs:
the high-low method, a scatter-graph, and least-squares
regression. Each of these methods attempts to separate
costs into components that remain constant (fixed) in total
regardless of the number of units produced and those that
vary in total in proportion to changes in the number of
units produced.
http://www.referenceforbusiness.com/management/CompDe/Cost-Accounting.html
RE:
Historical Richard Burger
Costs
9/18/2011 9:31:20
PM
The four methods for cost estimation are:
- Industrial engineering method
- Conference Method
- Account analysis method
- Quantitative method
RE:
Historical Travis Carroll
Costs
A
B
C
D
.
9/18/2011 9:36:48
PM
Account
analysis
In this method the cost function is estimated by analysing the cost associated
with each account and then classifying
each cost either as fixed cost, variable cost or semi-variable cost
on the basis of judgement.
Scatter graphs
This method involves the plotting on a graph the totals costs against each activity level. The total costs
are represented on the vertical Y -axis
and the activity levels on the horizontal X-axis. A straight line is fitted to the scatter of the plotted
points. The point where the line cuts the Y axis
is the fixed cost. The variable cost is the difference between any two points on
the stright line and is calculated by :
Differenec in cost/
Differenece in activity.
High-low
method
In this method, the periods of of highest and lowest activity levels are selected and the
changes in cost at these two levels are calculated
that result from these
two levels
Linear
regression
RE:
Historical Ahmed Abdelrazig
Costs
9/15/2011 10:37:34
PM
The four main methods to estimating a cost function
differ in many ways such as how expensive they are to
effectively be put to use and how accurate they are in
terms of the data used to come up with an estimate.
The industrial engineering method (aka work
measurement method) focuses on the relationship of
inputs and outputs and provides an estimate from those
figures. Another method is the conference method
which takes information from the different
areas/functions of a business and makes estimates
based on the data provided there. Since the conference
method focuses more on opinions instead of exact
numerical figures, estimates can be made much faster
and assuming the data provided is obtained from
highly qualified and professional members the
estimates can be quite accurate. Another method is the
account analysis method which provides the estimates
by grouping different costs as fixed or variable and
sometimes even as mixed depending on activity levels.
The quantitative analysis method is pretty self
explanantory as it is mainly just the use of numerical
figures that are used alongside an algorithmic formula
to come up with respective cost estimates, a simple
example being using Microsft Excel and the SUM
function to come up with total expected revenues for
different areas of a company.
RE:
Historical Dawn Baker
Costs
9/13/2011 6:07:48
PM
There are four methods of cost estimation that are listed in the
text:
1) Industrial Engineering Method - This method estimates cost
functions by analyzing the relationship between inputs and
outputs in physical terms.
2) Conference Method - This method estimates cost functions on
the basis of analysis and opinions about the cost and their drives
that are gathered from departments of a company.
3) Account Analysis Method - This method estimates cost
functions by classifying various cost accounts as variable, fixed or
mixed.
4) Quantitative Analysis Method - This method estimates cost
functions by using a formal mathematical method to fit cost
functions to past data observations. Microsoft Excel is one of the
tools that is used to perform this quantitative analysis.
RE:
Historical Tyrone Labad
Costs
9/14/2011 10:14:56
PM
Conference method estimates costs functions on the
basis of analysis and opinions about cost and their
drivers gathered from various sources. It also involves
pooling of expert knowledge and can be very time
consuming
Account analysis estimates cost functions by classifying
cost accounts in the ledger as a fixed, variable or mixed
cost with respect to the identified activity.
Quantitative method uses formal mathematical method
to fit linear cost functions to past data observations
Industrial engineering method estimates cost functions
by analyzing the relationship between inputs and
outputs in physical terms
I understand why Account analysis method is
widespread, after working through the example in the
text I can see how easy to use this method really is.
RE:
Historical Craig Bemis
Costs
9/13/2011 7:41:53
PM
The high-low method is one way to estimate a cost
function. With this method, only the highest and
lowest activity are used to estimate the variable and
fixed components of the mixed costs.
Regression analysis is also an approach used to
estimate a cost function. It is typically more accurate
than the high-low method, being that the high-low
method only uses two observations. Regression
analysis measures the average amount of change in the
dependent variable associated with a unit change in
one or more independent variables.
RE:
Historical Patricia Neal-Williams
Costs
9/14/2011 5:20:24
AM
Mixed costs have both a fixed portion and a variable
portion. There are a handful of methods used by
managers to break mixed costs into two manageable
components--fixed costs and variable costs. The
process of breaking mixed costs into fixed and variable
portions allow us to use the costs to predict and plan
for the future since we have a good insight on how
these costs behave at various activity levels. We often
call the process of separating mixed costs into fixed
and variable components, cost estimation.
The four methods of cost estimation are:
Account analysis
Scatter graphs
High-low method
Linear regression
RE:
Historical Stephanie McGrath
Costs
9/14/2011 6:28:32
PM
According to our text these are the four methods of cost
estimation. They differ in how expensive they are to
implement, the assumptions they make, and they
information they provide regarding the accuracy of the
estimated cost function. Companies typically use a
combination of all these methods to estimate costs. The
quantitative analysis method uses a mathematical
approach to fit cost functions to past data observations.
It seems as though the account analysis method is used
more frequently because it’s easy to use, reasonably
accurate, and cost-effective (Horngren, Datar, Foster,
Rajan, & Ittner, 2009, Cost Accounting, page 342343).
RE:
Historical Instructor Louviere
Costs
9/15/2011 2:05:05
AM
Are all future costs irrelevant?
Explain.
RE:
Historical David Bair
Costs
9/15/2011
6:08:35 PM
No, not all future costs are
irrelevant. Skunk costs
would be irrelevant, you have
them no matter what. Future
costs of materials, labor, and
other thigns of that nature are
very relevant.
RE:
Historical Tyrone Labad
Costs
9/16/2011
9:28:13 PM
As mentioned in
previous discussions
relevant costs are needed
to make decisions. Some
future costs are irrelevant
and other future costs
that are relevant. What
makes a future cost
relevant is if the cost
differs between
alternative decision
under consideration.
RE:
Historical Dominique Fryer
Costs
9/17/2011
3:24:00 PM
One way that
a future cost
would be
relevant is
when bidding
a job. You
must be able
to determine
what the price
will be at the
time of the
job or project.
Some
venders will
lock in a price
for a job but
some jobs
take months
to start. In
this case they
might not be
able to lock it
in that long so
in order to bid
the job you
must be able
to determine
what the price
will change
to. If not the
job will be
underbid
which will
result in a loss
of profit.
RE:
Historical James Kofoed
Costs
9/17/2011
10:13:47 PM
Future costs are irrelevant if
they do not have a bearing on
any of the alternatives that
are being analyzed.
Jim
Relevant
and
Irrelevant
Costs
Thomas Carter
9/12/2011 3:34:08 AM
Relevant costs are expected future costs that differ among alternative courses of action being considered.
Irrelevant costs represents a cost, either positive or negative, that does not relate to a situation requiring
management's decision.
RE:
Relevant
and
Irrelevant
Costs
Kanchi Patel
9/18/2011 3:41:12 PM
Good post Thomas. Making correct decisions is one of the most important tasks
of a successful manager. Every decision involves a choice between at least two
alternatives. The decision process may be complicated by volumes of data,
irrelevant data, incomplete information, an unlimited array of alternatives, etc.
The role of the managerial accountant in this process is often that of a gatherer
and summarizer of relevant information rather than the ultimate decision maker.
The costs and benefits of the alternatives need to be compared and contrasted
before making a decision. The decision should be based only on RELEVANT
information. Relevant information includes the predicted future costs and
revenues that differ among the alternatives. Any cost or benefit that does not
differ between alternatives is irrelevant and can be ignored in a decision. All
future revenues and/or costs that do not differ between the alternatives are
irrelevant. Sunk costs (costs already irrevocably incurred) are always irrelevant
since they will be the same for any alternative.
Relevant
Costs
Tara Sparks
9/12/2011 11:15:18 AM
Relevant costs are future costs which are used to make decisions. Historical costs are not
relevant because they are in the past, and only future costs are considered relevant. This
also ties into managerial decision making where sunk costs are not used in the decision
making process, as they may influence the manager to continue to make poor decisions
and throw good money after bad.
Relevant
Costs
Deyanira Barbosa
9/12/2011 4:57:48 PM
Relevant costs are costs that are relevant to a particular decision; also known as
differential costs. Historical costs are irrelevant for the simple reasons that they are past
costs that are not relevant with a current time period or when making decisions. They are
however helpful when making predictions.
Relevant
Costs
Michael Coleman
9/12/2011 5:49:47 PM
A relevant cost (also called avoidable cost or differential cost) is a cost that differs
between alternatives being considered. It is often important for businesses to distinguish
between relevant and irrelevant costs when analyzing alternatives because erroneously
considering irrelevant costs can lead to unsound business decisions. Also, ignoring
irrelevant data in analysis can save time and effort. Non-cash items, such as depreciation
and amortization, are frequently categorized as irrelevant costs, since they do not impact
cash flows.
Two common types of irrelevant costs are sunk costs and future costs that do not differ
between alternatives. Sunk costs are unavoidable because they have already been
incurred. Future costs that do not change between alternatives are also essentially
unavoidable with respect to the alternatives being considered
RE:
Relevant
Costs
Instructor Louviere
9/13/2011 6:36:22 PM
Class:
Another question: Define learning curve. Outline a model that can be used
when incorporating learning into the estimation of cost functions.
RE:
Relevant Deyanira Barbosa
Costs
9/16/2011 12:47:29 PM
The learning curve is tracks the resulting knowledge against the time
spent learning. The learning curve is especially useful in accounting to
achieve maximum efficiency and more efficient operations. It’s also
important to understand that the process tops once after the task has
been repeated a number of times.
RE:
Relevant David Bair
Costs
9/16/2011 4:31:26 PM
A learing curve is a specified amount of time where the employee learns
the correct functions and procedures of the position. Learning curves
vary in amounts of time and infastructure. What I mean is some
learning curves are nothing more than OJT (On the job trainning); while
other learning curves incorporate training classes, mentorships and
things of that nature. The example in the book uses an airplane
manufacturer and facilitates a training course for all new employees...
RE:
Relevant Daniel Arriagada
Costs
9/16/2011 7:30:37 PM
A learning curve is a function that measures how labor-hours per unit
decline as units of production increase because workers are learning and
becoming better at their jobs. Managers use learning curves to predict
how labor-hours, or labor costs, will increase as more units are
produced.
Manager use the learning curve to measure future costs for ex.
First Tennessee Banking Corporation used insights from cost estimation
to restructure its certificate of deposit (CD) offerings. First Tennessee
recognized that the cost of processing a CD was fixed regardless of the
amount of the certificate, but that the revenue was a function of the
dollar amount of the certificate. Therefore, a 90-day $500 CD that was
reopened four times a year generated only $5 per year on a 1% interest
spread, which was considerably less revenue than the cost of processing
the transactions. By applying ABC concepts and using the conference
method, First Tennessee found that 30% of its CD offerings were
providing 88% of CD profits, while another 30% of CDs were serviced
at a loss of 7%. As a result, of these findings, management worked to
enhance revenues through a combination of higher minimum balances,
new products and process redesign. Using a similar analysis, Bankinter
restructured its enrollment incentives and outreach strategy to attract
more profitable customers to its Internet banking service.
RE:
Relevant Michael Hayward
Costs
9/14/2011 12:29:24 PM
Learning Curve is a measurement of how labor hours will decrease and
production increase because of workers are becoming more efficient in
their jobs and gaining more knowledge. An airline company who fixes
aircraft, decided to establish a training course for all workers on the
specifics of the aircraft. Most of the workers never worked on aircraft or
never worked on the aircraft they will be working on. With this training
it should increase production and lower labor hours because of better
knowledge of the job.
RE:
Relevant Instructor Louviere
Costs
9/17/2011 4:21:25 AM
Class:
What are opportunity costs? Can you provide examples? How
would you evlauate these?
RE:
Relevant Ahmed Abdelrazig
Costs
9/17/2011 10:02:15
PM
Opportunity costs are the benefits that are given up
when allocating resources towards a different use.
Basically what ever a company is giving up when it
decides to go ahead with one decision over another has
some sort of opportunity costs. For example, if a
company had $500k that it could use to either improve
their production line productivity level or it could take
that $500k to fund a major advertising campaign from
a topnotch marketing firm. Proper evaluations should
take place before the decision is made on which way to
go with the $500k and lets say the company decides to
put that money towards their production line, then the
opportunity costs in this case would be the extra
exposure and increased demand that was given up
when they decided not to put the money towards the
advertising campaign.
RE:
Relevant Alvin Larkins
Costs
9/17/2011 1:12:55
PM
The cost of an alternative that must be forgone in order to pursue a certain
action. Put another way, the benefits you could have received by taking an
alternative action. For example, the opertunity cost is the wages lost
because you decided to go to college rather than get a job.
Read more:
http://www.investopedia.com/terms/o/opportunitycost.asp#ixzz1YEqw2LWt
RE:
Relevant Michael Hayward
Costs
9/17/2011 11:19:19
AM
Opportunity cost is the utilization of the company
resources for operating income which results in a loss
of funds. An example of opportunity cost is either
going to college or continue to work. I will
evaluate opportunity cost based on the level risk that
the opportunity presents and the reward.
RE:
Relevant Lisa Marie Johnson
Costs
9/18/2011 9:57:29
PM
Opportunity cost is the contribution to operating income
that is forgone by not using a limited resource in its nextbest alternative use.
When economists refer to the “opportunity cost” of a
resource, they mean the value of the next-highest-valued
alternative use of that resource. If, for example, you
spend time and money going to a movie, you cannot
spend that time at home reading a book, and you cannot
spend the money on something else. If your next-best
alternative to seeing the movie is reading the book, then
the opportunity cost of seeing the movie is the money
spent plus the pleasure you forgo by not reading the
book.
http://www.econlib.org/library/Enc/OpportunityCost.html
Why are
historical
costs
irrelevant
Michael Coleman
9/12/2011 5:55:53 PM
Historical costs can occur in the future but they cannot be changed that’s what makes
them irrelevant.
Historical
costs
Craig Bemis
9/12/2011 8:07:57 PM
A historical cost is a measure of value used in accounting in which the price of an asset
on a balance sheet is based on its original cost when acquired by the company. I would
think that a historical cost is irrelevant because it's value on paper doesn't change. Even
if the product that was purchased increases in value, it's cost is still reported as the
original cost. This is the same if the value goes down over time. So, a historical cost
would most likely not represent an accurate cost of the item.
Relevant
costs
Daniel Arriagada
9/12/2011 8:42:38 PM
Relevant costs are only costs and revenues that are expected to occur in the future and
differ among alternative courses of action.
Relevant costs are costs or expenses attributable or chargeable to one or more activities
on the basis of benefits received or some other logical relationship.
it is a differential or quantifiable future cost that must be considered in making a
particular decision
to be a Relevant Costs it must Occur in the future—every decision deals with
selecting a course of action based on its expected future results and Differ among the
alternative courses of action—costs and revenues that do not differ will not matter and,
hence, will have no bearing on the decision being made.
RE:
Relevant
costs
Instructor Louviere
9/13/2011 1:56:49 AM
Class:
When using the high-low method, should you base the high and low
observations on the dependent variable or on the cost driver? Explain.
RE:
Relevant Tyrone Labad
costs
9/13/2011 9:14:07 PM
When using the high low method, we use the cost driver or independent variable as the
base because it is used to predict the dependent variable.
RE:
Relevant Michael Coleman
costs
9/13/2011 6:50:39 PM
When using the high-low method you should base the high and low observations on the cost driver. By doing so,
you can determine the relationship between costs and the cost driver. The high-low method is the simplest to
comput and will give you a quick look on how the cost driver will affect costs.
The advantage of the high-low method is that it is simple to compute
and easy to understand; it gives a quick, initial insight into how the cost
driver—number of machine hours—affects indirect manufacturing labor
costs. The disadvantage is that it ignores information from all but two
observations when estimating the cost function.
RE:
Relevant Ellen LaChance
costs
9/13/2011 7:41:37 AM
When using the high-low method you should base the high and low observations on
the cost driver. By doing so, you can determine the relationship between costs and the
cost driver. The high-low method is the simplest to comput and will give you a quick
look on how the cost driver will affect costs.
RE:
Relevant Thomas Carter
costs
9/13/2011 3:51:05 PM
On page 346 of the textbook, the high-low method uses only highest and lowest
observed values of the "cost driver" within the relevant range and their respective costs
to estimate the slope coefficient and the constant of the cost function.
RE:
Relevant Instructor Louviere
costs
9/15/2011 2:06:00 AM
Distinguish between quantitative and qualitative factors in
decision making.
RE:
Relevant Elena Brechler
costs
9/17/2011 6:52:49
PM
Quantitative-how much will this decision make the
company or how much has been lost, etc. I think this is
in terms of money. Qualitative-will this improve our
processes, our service to the client, does our efficiency
need a boost?
RE:
Relevant Lisa Marie Johnson
costs
9/17/2011 6:20:30
PM
The difference between qualitative and quantitative
factors is with quantitative factors are expressed in
numerical terms such as financial or monetary (direct
materials, direct manufacturing labor), but they can
also be expressed in non-financial terms as well. But
qualitative factors are difficult to measure correctly in
numerical terms. Qualitative factors are not easily
measured in a financial expression so it makes it
difficult to draw conclusion and make the best
decisions.
RE:
Relevant Tara Sparks
costs
9/18/2011 11:44:15
PM
A quantitative factor is one which can have a
numerical value assigned to it, such as the increase in
sales. A qualitative factor is one which cannot be
measured numerically, such as the type of music
played in a store to keep customers comfortable and
encourage longer shopping times.
RE:
Relevant Dawn Baker
costs
9/15/2011 6:24:34
PM
In the decision making process, quantitative
factors are measured in numerical terms. The
examples that are provided in the text include
financial factors which are cost of direct
materials, direct manufacturing labor and
marketing. The non-financial factors that are
listed in the book include product-development
time and the percentage of flight arrivals at an
airline company. Qualitative factors aren't as
easily measured in numerical terms. An
example listed in the text would be employee
moral. Another example of qualitative factors
may include relationships with suppliers and
effects on customers.
RE:
Relevant Samantha Lack
costs
9/18/2011 10:31:26
AM
Dawn, thanks for the examples, I was trying to find an
example of qualitative factors but you are right
relationships seems a very logical and difficult thing to
measure so I would agree this is definitely qualitiative. I
would imagine that at some point customer satisfaction
could likely become more quantintative if you had
numbers to measure a customer's satisfaction like
maybe using statistical numbers or possibly surveys.
Professor what do you think? Would making this
information more measurable in numbers be more
likely to turn it in to a quantitative factor? One example
that might also be considered quantitative is number of
books sold in a store or by a certain author. I guess
anything that is meaurable in numbers could be
considered quantitative.
RE:
Relevant Janet Knowlden
costs
9/15/2011 4:54:08
PM
Quantitative factors are measured in numerical terms
and con be non-financial while qualitative factors can
be difficult to measure in numerical terms. In relevant
cost analysis, quantitative factors are measured in
financial terms.
RE:
Relevant Thomas Carter
costs
9/16/2011 5:41:23
PM
Quantitative factors, outcomes that are measured in numerical
terms, some quantitative factors are financial and they can be
expressed in monetary terms. Qualitative factors are outcomes
that are difficult to measure accurately in numerical terms,
employee moral is a good example how do measure moral in
numerical terms?
RE:
Relevant Freddy Rodriguez
costs
9/16/2011 6:26:21
PM
Quantitative and Qualitative are both Factors in Decision
Making. Quantitative factors provide a numerical bases decision
making. Some examples are: break even analysis, market
research, sales forecasting, and critical path analysis. Qualitative
factors need to incorporate the following: SWOT analysis, HRM,
PEST, and stakeholders analysis. Qualitative analysis takes into
account these other issues that may influence the decision
outcome. Therefore both, quantitative and qualitative factors have
to be considered for the correct decision to be made/chosen.
RE:
Relevant Deyanira Barbosa
costs
9/15/2011 12:11:07
PM
Quantitative Factors in decision making would be
break even analysis, market research, and sales
forecasting. These factors provide a numerical basis in
the decision making process. Qualitative factors
would be SWOT analysis, human resource
management, and stakeholder analysis. They
influence the decisions that have an impact on the
organization as a whole and how well departments
respond in times of need.
RE:
Relevant Ellen LaChance
costs
9/15/2011 2:13:27
PM
The difference between quantitative and qualitative
factors in decision making are - quantitative factors
measure outcomes in numerical terms and qualitative
factors are unable to measure accurately in numerical
terms. An example of a quantitative factor are costs
associated with an item, basically a financial or
monetary term. An example of a qualitative would be
something non-financial such as schedules.
RE:
Relevant Stephanie McGrath
costs
9/16/2011 6:08:02
PM
I have heard upper management at my work
use the term that it’s very hard to justify the
qualitative factors in their decision making.
Qualitative factors deal with data that can’t
be measured; quantitative factors deal with
data that can be measured. What I think they
are referring to is that some factors are nearly
impossible to measure. For example, it’s
difficult to measure how much value will be
added if we change our corporate branding
color from green to blue. We wouldn’t know
the actual results until the change was tested
and analyzed.
RE:
Relevant Elena Brechler
costs
9/17/2011 7:26:31
PM
It is difficult to measure
some qualitative factors but
sometimes the change based
on these is needed. For
example, at my company, we
re-vamped our website to
have our clients be able to do
everything online. Our
company felt it would help
the client and keep them
happier and we were unable
to measure anything until
after it Was put in place.
Now we know that clients
love the accessibility and that
they require us for less
because they can do
everything online so it saves
on labor.
RE:
Relevant David Bair
costs
9/18/2011
9:41:18 AM
Elena,
I think by doing so,
your putting more
power into your
customers hands.
Everyone likes to be
in control of what
they are doing. By
making everything
accessable online,
your empowering
your customers.
That was a great idea
and I think that more
and more companies
are going to be doing
that...
RE:
Relevant Instructor Louviere
costs
9/17/2011 4:22:19
AM
Class:
Describe the main measures
used in the theory of
constraints.
RE:
Relevant Richard Burger
costs
9/17/2011
8:11:35 AM
The main measures used in the theory of constraints
(TOC) are:
1. Throughput, the rate at which the system generates
money through sales, not through production. Goods
are not considered an asset until sold. This contradicts
the common accounting practice of listing inventory as
an asset even if it may never be sold.
2. Inventory/Investment, the money invested in goods
that the firm intends to sell or material that the firm
intends to convert into salable items. The concept of
value-added and overhead are not considered.
3. Operating expenses/costs, all the money the firm
spends converting inventory into throughput. The
objective is, is to increase throughput and/or decrease
inventory and operating expense in such a way as to
increase profit, return on investment, and cash flow.
Read more: Theory of Constraints - strategy,
organization, system, style, examples, manager, model,
company, business
http://www.referenceforbusiness.com/management/StrTi/Theory-of-Constraints.html#ixzz1YDdNd5zH
RE:
Relevant Alvin Larkins
costs
9/18/2011
6:50:41 PM
The text book list the
measures as:
1.Throughput
contribution equals
revenues minus the
direct material costs
of the goods sold.
2.Investments equal
the sum of materials
costs in direct
materials, work-inprocess, and finished
goods inventories;
R&D costs; and
costs of equipment
and buildings.
3.Operating costs
equal all costs of
operations (other
than direct materials)
incurred to earn
throughput
contribution.
Operating costs
include salaries and
wages, rent, utilities,
depreciation, and the
like.
RE:
Relevant Patricia Neal-Williams
costs
9/15/2011 7:45:48 AM
The high-low method uses the highest and lowest activity levels over a
period of time to estimate the portion of a mixed cost that is variable and
the portion that is fixed. Like the account analysis and scatter graph
method, the amounts determined for fixed and variable costs are only
estimates. Because it uses only the high and low activity levels to
calculate the variable & fixed costs, it may be misleading if the high and
low activity levels are not representative of the normal activity.
RE:
Relevant Elena Brechler
costs
9/18/2011 3:42:56 PM
When using the high-low method, one should base the observations on
the cost driver to look at the relationship between the cost driver and the
cost. The cost driver could be machine hours per se.
RE:
Relevant Tara Sparks
costs
9/17/2011 6:51:48 PM
When using the high-low method the cost driver is used to base your
observations on. The cost driver is the activity which will be
determining the estimate of costs.
Relevant
Costs
Freddy Rodriguez
9/13/2011 4:58:23 PM
The Investopedia describes Relevant Costs as management decision specific. Some examples of when
management uses relevant costs are when it is determining whether to sell or keep a business unit, make or
buy an item, or accept a special order. In other words and my understanding is that management needs
relevant information to make a correct decision.
Historical Costs are irrelevant because they are sunk cost and irrelevant costs simply are costs that will not
affect the management decision and management will be wasting their time and efforts as these costs do not
affect the decision they are going to make.
Relevant
Costs
Samantha Lack
9/13/2011 6:48:04 PM
Relevant costs are costs that are expected to occur in the future. Historical information may be helpful with
predictions but because they are past costs (aka Sunk Costs) they are irrelevant.Sunk costs are unavoidable
and can't be changed with any action; fort his reason, these costs are irrelevant to the decision making
process. An example in our text of irrelevant costs is on page 389. It discusses Precision Sporting Goods,
and mentions that the revenue, direct materials, manufacturing overhead, and marketing items can be
ignored because in they will remain the same whether the sporting goods store reorganizes or not. They do
not differ between the alternatives so therefore they are irrelevant.This being said, it is appropriate to say
that not all future revenues and and future costs are relevant. It is important in decision making to
determine an answer to the following question. What difference will a particular action make. This is where
qualitative and quantitative factors need considered.
Works Cited
Horngren, C. T., Datar, S. M., Foster, G., Rajan, M., & Ittner, C. (2009). Cost Accounting-A
Managerial Emphasis. Upper Saddle River: Pearson Prentice Hall.
Relevant
cost
Michael Hayward
9/13/2011 10:47:14 PM
Relevant costs are cost that have direct impact on a specific decision that may be
important to different situations. Relevant cost can determine if you are going to buy or
sell a product or special items for the company. Historical cost are irrelevant, because
costs from 20 years ago isn't the same type of cost as today. The change in the economy
and our economical situation. For example, the fixed overhead from 20 years ago will not
be the same, so the that cost will not be relevant to the overhead costs decisions of today.
Relevant
Costs
Ahmed Abdelrazig
9/13/2011 11:04:42 PM
Relevant costs are costs that are expected to come about in the future that differ among
the alternative courses of action that may be considered at one point in time. Past costs
are considered irrelevant from the view of making a decision today or in the future but
they should not be completely overlooked as they can help guide and predict how things
may go. In terms of black and white with no shades of grey, historical costs must be
taken irrelevant when it comes to time to making a decision.
Relevant
Costs
Janet Knowlden
9/14/2011 7:24:20 AM
Relevant costs are expected future costs. According to our text,
to be relevant costs and relevant revenues they must
■ Occur in the future—every decision deals with selecting a course of
action based on its expected future results—and
■ Differ among the alternative courses of action—costs and revenues
that do not differ will not matter and, hence, will have no bearing on the
decision being made.
(Cost Accounting, 13th Edition. Pearson Learning Solutions pp. 388 - 389).
<vbk:9781256083375#outline(15.4.2)>
Historical costs are irrelevant because they are in the past and have no bearing on
decision making.
RE:
Relevant
Costs
Instructor Louviere
9/17/2011 4:23:56 AM
Class:
Discuss the management of bottlenecks in operations. Can you give some
examples and solutions?
RE:
Relevant Dawn Baker
Costs
9/18/2011 4:00:11 PM
The three steps listed in the text which help to manage bottleneck operations are:
1) Recognize that the bottleneck operation determines throughput contribution of the
entire system.
2) Identify the bottleneck operation by identifying operations with large quantities of
inventory waiting to be worked on.
3) Keep the bottleneck operation busy and subordinate all nonbottleneck operations to
the bottleneck operation.
RE:
Relevant Samantha Lack
Costs
9/17/2011 2:52:57 PM
According to our textbook there are several steps a manager can take to manage
bottlenecks in operations.
1.Eliminate idle time at the bottleneck operation
2. Process only those parts or products that increase throughput contribution. Making
products that will remain in inventory does not increase throughput contribution.
3.Shift products that do not have to be made on the bottleneck machine to
nonbottleneck machines or to outside processing facilities.
4. Reduce setup time and processing time at bottleneck operations, this can be done by
simplifying the design or redudcing the number of parts in the product.
5.Improve the quality of the parts or products manufactured at the bottleneck operation
(Horngren, Datar, Foster, Rajan, & Ittner, 2009)
Works Cited
Horngren, C. T., Datar, S. M., Foster, G., Rajan, M., & Ittner, C. (2009). Cost
Accounting-A Managerial Emphasis. Upper Saddle River: Pearson Prentice
Hall.
RE:
Relevant Janet Knowlden
Costs
9/17/2011 7:30:45 PM
The management of bottlenecks in operations occurs through the theory
of constraints emphasizing the improvement of production operations
performance as a whole and it focuses on short-run maximization of
throughput contribution. It also complements the long-run strategiccost-management focus of ABC.
RE:
Relevant Tara Sparks
Costs
9/18/2011 11:41:12 PM
Managing bottlenecks in operations is a matter of ensuring that the
goods needed to process those points have enough supplies to maintain
the highest possible output, without having so much stocked up that it
inhibits production flow.
sunk
cost
Alvin Larkins
9/14/2011 5:29:40 PM
Historical Cost is considered sunk cost, what cannot be change. When making decisions there is nothing a
manger can do with Historical cost, because they are already incurred. With Relevant Cost a manager can
make decisions and take actions to directly affect lowering cost. What cannot be changed is irrelevant, but
we can always change the future.
RE:
sunk
cost
Dominique Fryer
9/18/2011 5:13:33 PM
The only relevance that a historical cost would have for a company would be to
compare the price to the price of the same product in the past. This will let the
company know if and how much the price has changed. This information could
be useful when negotiating future prices. They can inform them that they have
changed the price a large amount and that they should get some sort of discount
increase or static price based on the quantity of past sales.
Why are
historical
costs
irrelevant
Daniel Arriagada
9/14/2011 5:52:11 PM
They are irrelevant because they are sunk costs, it is a past cost and there is nothing you
can do to avoid it. That's why is irrelevant, because is already there.
Relevant
Costs
Lisa Marie Johnson
9/14/2011 9:30:55 PM
What are relevant costs? As described in our text, relevant costs are expected future costs
that differ among alternative courses of action being considered. We must consider the
main two points of relevant costs, that they occur in the future and that they differ among
alternative courses of action. In the decision making process and considering relevant
information, person must ask "what difference will a particular action make?" Also
consider that when dealing with relevance, relevant revenues (expected future revenues).
Why are historical costs irrelevant? Because historical costs are past cost that are
irrelevant to current decision making, a person can always review historical costs to make
predictions but it's irrelevant to making decisions going forward.
Relevant
Costs
Deborah Kieffer
9/14/2011 11:27:46 PM
Relevant costs are expected future costs. Historical cost data may be used to predict future outcomes,
however, as we learned in the cause and effect section historical costs are not always accurate predictors as
levels of activity may be very different between past and present (and future).
Relevant
and
Irrelevant
Costs
Brandon Green
9/14/2011 11:28:36 PM
An interesting question for me since I've been dealing with just this kind of information
today. I know what I want to do in the future more or less to which extent I was looking
into a couple pieces of property. Part of that included checking out the information on the
county assessor's page, and in there is what the assessor thinks the property is worth
according to their evaluation. However, just being a thorough and curious sort I wanted to
know what the original purchase price was including all taxes paid since the properties
purchase by the owner. My interest was in knowing the difference between what the
assessor valued the property at vs. what the owner actually paid for the property
including all taxes paid since the purchase. I had difficulty locating this information as
records available online only go so far back and the property was purchased in 78'. The
assessor's page had this little not saying to call for records not shown and to get the most
up-to-date reliable information possible. So, I did just that. When I got to asking about
the original purchase price I was told that information could be found on the deed at the
recorder's office. However, this lady I spoke with told me, being it was her job to know a
lot of this stuff I was asking about, it was irrelevant what the property was originally
purchased for, and if I really wanted to consider making an offer I should be go off the
most current information. From what information I did gather I'm guessing what the
property is evaluated at vs. what the original purchase price was with all taxes paid since
the purchase is pretty darn close to same. In any case the historical cost I was interested
in knowing was deemed irrelevant in making my decision. I take some issue with that
because I still think it's good information to know, but all in all it didn't do me much good
to consider the historical cost in terms of making a decision today. So, historical costs are
irrelevant because they have little bearing on the current situation. Other factors besides
the historical cost will be more meaningful in terms of making decisions. It's kind of like
the idea of old Model-T Ford. What it cost back in the day is irrelevant as to what it may
cost today. You may find one that's rusted to pieces, falling apart, damaged and so on, but
the current condition and considering their rarity today is what determines relevancy in
terms of cost and not what it cost someone to purchase the thing when they were being
made.
Relevant
Costs
David Bair
9/15/2011 6:06:50 PM
Relevant costs are expected future costs that differ among alternative courses of action
being considered. (Same goes for relevant revenues...) Historical costs are irrelevant
because they generally don't change dynamics, their more of a skunk cost than anything,
Summary
Post –
Relevant
Costs
Instructor Louviere
9/18/2011 12:42:16 PM
TCO 3. Given a company introducing a new product, process, or service, select a
plausible cost driver and estimate and evaluate a cost function based on analysis of
current or past cost relationship.
TCO 4. Given company information, estimate the costs of two proposed methods of
assembly of a new product, applying appropriate learning models to labor costs. Explain
how learning curves can be used in preparing budgets and performance evaluation.
TCO 5. Given the scenario of a manufacturing manager with a plant running near
capacity, compute and compare the cost to make or buy, and then evaluate whether a
special order should be accepted; make and support your recommendations regarding
which parts or services should be outsourced. Illustrate how scarce resources or other
constraints can be managed to maximize profits using a contribution margin analysis of
the selected constraint.
This discussion has dealt defining concepts that encompass relevant costs. In terms of our
TCOs, relevant costs are certainly applicable as we, the decision-makers, must be able to
discern what information is important to our decisions. It is just as critical to know what
information is not important.
Hence, it is important, to check our emotions at the door when we are attempting to
make an informed decision, no matter the circumstance. While this focus may seem
singularly quantitative, that is not always the case as the quantitative data may be lacking.
Therefore, it is important that we also evaluate pertinent qualitative input when
appropriate.
The hard part is knowing when.