ACCTG 221 Chap.9 Relevant Costing and Short-Run Decisions
Relevant Costing and Short-Run Decisions
Short-run decisions compare future amounts that differ between alternatives. Sunk cost and unavoidable allocated fixed cost are excluded even when they appear in a product-cost report. Spare capacity usually makes opportunity cost zero; constrained capacity creates a cost equal to contribution forgone elsewhere.
The same logic supports special orders, keep-or-drop, make-or-buy and product-mix decisions, with qualitative effects considered after the differential financial table is complete.
What this chapter covers
- 01
Future and differential information
- 02
Sunk and unavoidable costs
- 03
Special orders under spare or full capacity
- 04
Keep-or-drop and avoidable fixed cost
- 05
Make-or-buy and supplier effects
- 06
Contribution per scarce-resource unit
Worked example · free
Waiheke Workwear: capacity and a special order
- +1Incremental revenue = 1,500 × $74 = $111,000.
- +2Variable cost = 1,500 × $52 = $78,000 and relevant setup cost is $6,000.
- +2Opportunity cost = 600 × $28 = $16,800.
- +2Incremental profit = $111,000 minus $78,000 minus $6,000 minus $16,800 = $10,200.
Key terms
- Sunk cost
- A past cost unchanged by the current alternatives.
- Differential amount
- A future cash flow that differs between options.
- Opportunity cost
- The contribution forgone from the best displaced use.
- Avoidable fixed cost
- A fixed cost removed by choosing an alternative.
- Constraint
- A scarce resource limiting output.
Relevant Costing and Short-Run Decisions FAQ
Why are allocated fixed costs often irrelevant?
An accounting allocation can remain after a product or department is removed. Only the portion that actually disappears, or changes under another alternative, belongs in the decision table.
When does a special order carry opportunity cost?
Opportunity cost arises when the order uses capacity that could earn contribution elsewhere. With genuine idle capacity and no alternative use, the forgone contribution is zero.
How are products ranked under a constraint?
Divide each product's contribution by its use of the scarce resource. Contribution per product can mislead when products consume very different quantities of bottleneck time or material.
Exam move
Write one column per alternative and include a line only when a future amount differs. Mark historical book values and unavoidable allocations as excluded rather than silently deleting them; this shows the classification. Read the capacity sentence before computing a minimum price. When capacity is constrained, calculate forgone contribution from the best displaced use and rank products by contribution per bottleneck unit.
Reconcile the incremental profit to the change in total contribution and avoidable fixed cost. Then add qualitative factors that genuinely differ: quality, reliability, customer response, workforce capability, supplier dependence and strategic positioning. Do not let a positive short-run number end the analysis if it damages a binding relationship or long-term capacity.
Rotate through special-order, keep-or-drop, make-or-buy and constraint cases while keeping one comparison format. Name the alternatives across columns, state the decision horizon and include only future differences. Mark a sunk amount or unavoidable allocation explicitly as excluded so the classification can be reviewed.
For special orders, split units between idle and displaced capacity when necessary and calculate forgone contribution from the best displaced use. For keep-or-drop, compare lost contribution with avoidable fixed cost and any alternative use of released capacity. For make-or-buy, distinguish avoidable internal resources from common costs that remain and add supplier quality, reliability and dependence to the discussion.
Under a bottleneck, compute contribution per unit of scarce resource and allocate capacity in that ranking order, subject to demand limits. Test whether paying to relax the constraint costs less than the extra contribution released. After each table, reconcile the incremental result to the change in total profit.
Write a conditional recommendation that identifies the capacity assumption and one qualitative issue requiring evidence. In revision, deliberately change the time horizon or capacity fact and explain which cost classification changes. This trains the central habit: relevance belongs to a specific alternative and period, not to a permanent list of variable and fixed labels.
Add one scenario in which a currently unavoidable resource becomes avoidable after a longer notice period. Recalculate at both horizons and explain why the recommendation changes. This demonstrates that relevance is conditional on timing and prevents a fixed-cost label from becoming a permanent classification when contracts, staffing or capacity options can change.
Check that qualitative factors are genuine differences between alternatives, not a generic list attached after the numerical recommendation.
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