22108 Chap.11 Short-Term Decision-Making Using Relevant Costing
Short-Term Decision-Making Using Relevant Costing
Week 11 reduces a family of decisions to a single test: a cost or revenue matters only if it lies in the future and differs between the alternatives. (standard canon - NOT from this course's materials). The official schedule names Topic 11 'Short-term decision-making using relevant costing', but no learning-content page, deck or tutorial material for it was available when this guide was written, so this chapter teaches the standard first-year treatment - confirm the emphasis on the Canvas Topic 11 page and your Subject Outline. Two Week 11 facts are officially scheduled and worth planning around: the large workshop that week covers setting up for online exams, and the Stage 2 written reflection falls due in the same week.
What this chapter covers
- 01(standard canon - NOT from this course's materials) - confirm the emphasis on the Canvas Topic 11 page and your Subject Outline
- 02The relevance test: a cost or revenue is relevant only if it is a FUTURE amount AND it DIFFERS between the alternatives
- 03The classic irrelevancies: sunk costs, unavoidable committed future costs, allocated common fixed overhead, and the book value of an existing asset (though its disposal proceeds are relevant)
- 04Opportunity cost - the contribution forgone from the best alternative use of a resource - is relevant even though it never appears in the accounts
- 05Special order: accept if incremental revenue exceeds incremental cost, given spare capacity and no damage to the normal market; the minimum price differs with and without spare capacity
- 06Make or buy: compare avoidable cost to make against the purchase price net of any benefit from the released capacity
- 07Keep or drop, and sell now or process further: drop only if avoidable fixed costs exceed the contribution margin lost; joint costs before split-off are always sunk
- 08Constrained resources: rank by contribution margin per unit of the scarce resource, not per unit of product - plus the qualitative overlay every decision needs
A make-or-buy decision, then the same decision with an opportunity cost
- +1Apply the relevance test to each line. Direct materials, direct labour and variable overhead are future costs that disappear if production stops, so they are relevant. The $18,000 supervisor salary is an avoidable fixed cost, so it is relevant. The remaining $32,000 of allocated head-office overhead continues whichever way the decision goes, so it is NOT relevant - only its allocation moves.
- +1Relevant cost to make = variable costs + avoidable fixed costs = (6 + 4 + 2) x 10,000 + 18,000 = 120,000 + 18,000 = $138,000. Note this is $13.80 per unit, not the $17 per unit the full absorption cost suggests - importing the $17 is the classic error.
- +1Relevant cost to buy = purchase price x volume = 15 x 10,000 = $150,000. Making is cheaper by 150,000 - 138,000 = $12,000, so on these figures the business should MAKE.
- +1Now add the opportunity cost. If buying frees capacity that would earn $20,000 of contribution elsewhere, that benefit belongs in the comparison: net relevant cost to buy = 150,000 - 20,000 = $130,000, against $138,000 to make. Buying is now better by $8,000, so the decision reverses.
- +1Finish with the qualitative overlay, which carries marks in its own right. Consider supplier reliability and quality, the strategic risk of depending on a single external source, what happens to the supervisor and other staff, whether the $15 price is guaranteed beyond the first year, and whether the alternative product's $20,000 contribution is genuinely achievable. A decision this close on the numbers should turn on those factors.
Key terms
- Relevant cost
- (standard canon - NOT from this course's materials). A cost or revenue that is both in the future and different between the alternatives being considered. Anything failing either test is irrelevant to the decision, however large it looks.
- Sunk cost
- A cost already incurred and unrecoverable. It is identical under every alternative, so it is never relevant - including the book value of an existing asset, although the proceeds from disposing of that asset are relevant because they differ between alternatives.
- Opportunity cost
- The contribution forgone from the best alternative use of a resource. It never appears in the accounting records, which is exactly why it is the most commonly omitted relevant item.
- Avoidable vs unavoidable fixed cost
- An avoidable fixed cost disappears if the alternative is taken (a supervisor's salary on a line that closes); an unavoidable or common fixed cost continues regardless, and allocating it to a segment does not make it avoidable. Only avoidable fixed costs belong in the analysis.
- Incremental (differential) analysis
- The presentation format for these decisions: one column per alternative plus a difference column, containing only the items that differ. Explicitly listing the excluded items with their reason is part of a full answer.
- Contribution per unit of the constraint
- Contribution margin per unit divided by the units of the scarce resource each product consumes. When one resource is scarce, produce in descending order of this ratio - ranking by contribution per unit of PRODUCT is the classic error.
Short-Term Decision-Making Using Relevant Costing FAQ
Why does this chapter say it is standard canon?
(standard canon - NOT from this course's materials): the schedule names Topic 11 'Short-term decision-making using relevant costing', but no learning-content page, deck, tutorial or practice material for Topics 7 to 12 was available when this guide was written. This chapter therefore teaches the standard first-year treatment of relevant costing, makes no claim about how your offering examines it, and does not continue the earlier teaching cases. Two Week 11 facts that ARE officially scheduled: the large workshop that week is on setting up for online exams, and the Stage 2 written reflection is due that week. Confirm everything else on the Canvas Topic 11 page and your Subject Outline.
Why is allocated fixed overhead usually irrelevant?
Because allocation moves a cost between cost objects without changing the total the business incurs. If head office costs $32,000 whether or not a component is made in-house, then dropping the component does not save $32,000 - it just pushes that charge onto whatever remains. The trap is that absorption costing prints a tidy per-unit figure that includes it, and it is very tempting to compare that per-unit figure to a supplier's price. Always rebuild the relevant cost from the items that actually change, and check whether any part of the fixed block is genuinely avoidable.
What is the difference between a special order at spare capacity and at full capacity?
The opportunity cost. With spare capacity, the minimum acceptable price is the variable cost per unit plus any incremental fixed or set-up cost the order causes - the existing fixed costs are unaffected, so anything above that adds profit. At full capacity, accepting the order means displacing regular sales, so the contribution forgone on those sales must be added: the minimum price becomes variable cost per unit, plus any incremental fixed or set-up cost per unit, plus contribution forgone per unit. Beyond the arithmetic, always raise whether a discounted price will leak into the normal market and undermine regular pricing.
Can AI help me sort relevant from irrelevant costs?
Yes, and the sorting step is the one worth practising most. Sia is an AI tutor built to mirror how 22108 is taught and assessed at University of Technology Sydney: give it a mixed list of costs for a decision and sort them yourself first, then ask it to check each classification and explain any it disagrees with - the explanation is the part that transfers to the exam. It can also build incremental-analysis templates for the standard decision set and add opportunity-cost variants so the answer flips. Because this chapter is standard canon rather than your offering's own material, confirm scope against your Canvas topic page. It explains step by step and does not do graded assessment for you; the UTS academic-integrity policy applies.
Exam move
Practise the sort before you practise the sums, because the arithmetic in these questions is trivial and the marks sit in what you include. Take any decision scenario and route every line through two questions - is it in the future, and does it differ between the alternatives - then write the excluded items in a short list with the reason beside each. Learn the five decision shapes as one method rather than five formulas: special order, make or buy, keep or drop, sell now or process further, and allocating a constrained resource all reduce to comparing the items that change. Give opportunity cost deliberate attention, since it is invisible in the accounts and therefore the easiest thing to leave out, and give sunk costs the same treatment from the other direction. Always close with a qualitative paragraph on capacity, quality, reliability, staff and reputation, because a decision made on numbers alone is an incomplete answer. Plan around Week 11 as a calendar week too: the Stage 2 written reflection is due and the large workshop covers online-exam setup, so it is a busy week that rewards starting early. (standard canon - NOT from this course's materials) - confirm scope on the Canvas Topic 11 page and the Subject Outline.
Working through Short-Term Decision-Making Using Relevant Costing in 22108? Sia is AskSia’s AI Accounting tutor — ask any 22108 Short-Term Decision-Making Using Relevant Costing question and get a clear, step-by-step explanation grounded in how 22108 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
