Professional Documents
Culture Documents
Relevant Costs
in Decision
Making
1
Decision Making
Introduction
Relevant Vs. Sunk cost
Make or Buy decision making
Shutdown Cost
Joint Product
Joint Product Cost Allocation
Introduction of new product
2
Relevant Cost
3
Relevant Cost
4
Relevant Cost
5
Relevant costs draw our alternation
to those elements of cost which are
relevant for decision.
e.g. 1) Fixed Cost for project X is Rs.
5 lakhs and for alternative project Y
it is 7 lakhs.
therefore fixed cost is relevant in
this example.
6
E.g. 2) Direct material under
alternative I- Rs. 150 per Kg.
Direct material under alternative II-
Rs. 150 per Kg.
therefore variable cost is not relevant
in this example.
7
SUNK COSTS
9
Sunk Cost
10
Sunk Cost do not affect future costs
and cannot be changed by any
current or future action, hence
these costs are irrelevant in decision
making.
Ex. Spending on advertising during
product launching is sunk for taking
a decision on continuance of product
11
Make / Buy
13
Elements of the "make“ analysis
include:
Incremental inventory-carrying
costs
Direct labor costs
Incremental factory overhead costs
Delivered purchased material costs
14
Incremental managerial costs
Any follow-on costs stemming from
quality and related problems
Incremental purchasing costs
Incremental capital costs
Ms. Keshav (Case)
15
Cost considerations for the "buy"
analysis include:
Purchase price of the part
Transportation costs
Receiving and inspection costs
Incremental purchasing costs
Any follow-on costs related to quality
or service
16
Shutdown Cost
17
Shutdown Cost
19
Introducing new Product
20
(2) demand is sufficient and
sustainable enough for the proposed
product to make a profit.
In other words, successful
enterprises sell what customers want
to buy rather than what the
entrepreneur wants to sell.
21
Introducing
new Product
All relevant costs should be
recovered over a period of product
life.
22
Joint Product
23
Joint Product
24
Joint Products usually
require further processing.
25
Joint Products.
in Coke production, Coal is raw
material with Coke, Sulfate of
ammonia, light oil asjoint
products.
26
E.g. Refining Process,
where crude oil is raw
material gives Petrol, Diesel,
Gas as Joint Products.
27
Joint Product Cost
Allocation
Separate Final
Joint Processing
Costs Sale
Petrol Separate
Processing
Processing Costs
Costs
Joint
Crude Production
Oil Process
Separate Final
Processing
Sale
Diesel
Separate
Separate
Split-Off Processing
Processing Costs
Costs
Point
28
By Product
29
By Product
ex. of By-products
in coke manufacture - gas and tar
in lumber mills - sawdust.
cotton cleaning process - cotton seed
coconut oil industry - coca shells
31
Terminology
32
Terminology
33
Split Off Point: The point in
the production process
where the individual
products become separately
identifiable.
34
Joint Cost
Allocation:
Methods
• Physical units method
• Relative Sales Value Method
• Sale value at split off point
• Net Realisable value method
35
Allocating
Joint Costs
Allocation based on a
Physical Units physical measure of the
product produced eg
Method Weight
36
Allocation is based on
Constant Gross estimated sales value
Margin method at split off point
Allocation based on
Net-Realizable- sales value less post-
Value Method separation processing
costs
37