ACCT90009 Chap.7 Relevant Costs for Decisions

Relevant Costs for Decisions

Standard canon anchored to Week 7. Include future amounts that differ, plus opportunity cost of scarce resources.

Exclude sunk and common allocations while retaining quality, capacity, resilience, people and implementation conditions.

Detailed chapter study map

AskSia Library · ACCT90009 · Strategic Cost Management · University of Melbourne RELEVANCE TEST Week 7 · standard canon STANDARD CANON Future and different — the relevance test Incremental cash flows, opportunity cost and qualitative conditions The official Week 7 topic is Relevant Costs for Decision Making.

This chapter presents standard accounting canon rather than current lecturer emphasis. A relevant amount occurs in the future and differs between alternatives. Sunk cost fails the future test; a common future cost fails the difference test. An opportunity cost may not appear in the accounting system but belongs when choosing one alternative sacrifices the best use of a scarce resource.

Relevant-cost decision tree A cost is relevant only

when it is future and differs between alternatives. Opportunity cost is separately added when a scarce resource has a better use. Original schematic. Classify the changed amount A cost category can be partly relevant. A salary may continue under both alternatives except for an avoidable overtime component.

Depreciation is often sunk, while resale value of the asset differs and is relevant. Analyse cash/resource consequences item by item rather than labelling an entire account. Qualitative is not decorative Quality, delivery, supplier resilience, workforce capability, privacy, customer trust and strategy can alter or constrain the choice.

Quantify where evidence permits, state the rest explicitly and explain what would be monitored. ! Allocated fixed cost is not automatically

relevant Include only the future amount that changes. An allocation disappearing from one report may simply move to remaining objects. Relevant costing asks what the organisation gives up or gains, not what the current report assigns.

Relevance principle {PG} · asksia.ai/explore AskSia Library · ACCT90009 · Strategic Cost Management · University of Melbourne CLASSIFICATION Cost classification Sunk, avoidable, incremental and opportunity Labels that describe alternatives, not accounts Item Decision meaning Treatment Sunk cost Already incurred; cannot change Exclude, but learn from it Avoidable cost Removed if alternative chosen Include amount avoided Incremental cost Additional future cost Include Differential revenue Future revenue difference Include Opportunity cost Best benefit forgone Include when resource is scarce Common future

cost Same under all alternatives Exclude from comparison Allocated cost Assignment, not economic behaviour Test underlying resource Relevant classification belongs to the choice and horizon.

A warehouse lease may be unavoidable for a one-month outsourcing decision and avoidable at renewal. A skilled team’s salary may be common if retained under both alternatives, while its opportunity cost matters when the team can work on a profitable project. Book value versus disposal proceeds Book value is generally a past accounting amount. Cash received from sale or cost of disposal is future and differs.

Tax consequences can also differ. Do not include book value merely because it appears beside the asset in the ledger. Past cost can still

inform Excluding sunk cost from arithmetic does not mean ignoring why it occurred. It may reveal forecast bias, contract risk or capability. Use it for learning and accountability, not to justify throwing more resources after a failed plan.

P7.1 Sunk Answer included A machine cost $200,000 last year and has no alternative use. Relevant to whether to run one more batch? Answer. The purchase price is sunk. Include future operating cost and any disposal/opportunity effect that differs. P7.2 Opportunity Answer included Idle space has no alternative use. Opportunity cost? Answer.

Zero for that horizon, though future lease or strategic options may change the conclusion.

{PG} · asksia.ai/explore AskSia Library · ACCT90009 · Strategic Cost Management

· University of Melbourne MAKE OR BUY Make or buy Compare avoidable internal cost with supplier cost Capacity release, quality, resilience and opportunity A make-or-buy schedule includes internal resources that disappear or change if the item is purchased, the supplier price and related buying costs, plus opportunity cost of released constrained capacity.

Unavoidable allocated fixed cost remains common. The conclusion must address supplier performance, intellectual property, workforce capability and reversibility.

MAKE–BUY FRAME Relevant make = avoidable materials + labour + overhead + opportunity cost of retained capacity Relevant buy = supplier price + logistics + quality/contract costs − benefits from released capacity Capacity release is a separate line If buying releases a machine but no

cash or alternative use follows, there may be no financial benefit.

If the capacity supports another product, include the forgone contribution as opportunity cost of making. Do not count the same benefit both as avoided cost and opportunity revenue. Strategic supply questions Assess defect rate, lead-time variability, minimum quantities, currency and escalation clauses, switching cost, continuity, data access and learning.

A low quote can be an entry price that changes once internal capability is removed. ✓ State the horizon Short-run analysis often retains staff and facilities; long-run analysis may allow restructuring. Present both when the recommendation depends on implementation timing. P7.3 Avoidability Answer included Allocated headquarters cost remains after outsourcing. Include? Answer.

No in the

incremental comparison; disclose full-cost recovery separately. P7.4 Capacity Answer included Released hours earn $5 contribution each elsewhere. Treatment? Answer. Include as opportunity benefit of buying, or equivalently opportunity cost of making, once only. {PG} · asksia.ai/explore AskSia Library · ACCT90009 · Strategic Cost Management ·

What this chapter covers

• 01

  Future-and-different test

• 02

  Make/buy and special order

• 03

  Keep/drop and constraints

• 04

  Thresholds and implementation

AskSia-authored practice weighting (not an official mark scheme): Make or buy

Key terms

Sunk cost

Past amount that cannot change.

Opportunity cost

Best benefit forgone.

Relevant Costs for Decisions FAQ

Exam move

Reconstruct each alternative from future resources, solve the reversal point, then make transition and resource-release actions explicit.

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