RELEVANT COSTING AND DECISION

MAKING
RELEVANT COSTING AND DECISION MAKING

TABLE OF CONTENTS
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DECISIONS
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INFORMATION FOR DECISION MAKING
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RELEVANT COSTS AND REVENUES
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NON RELEVANT COSTS AND REVENUES
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RULES FOR IDENTIFYING RELEVANT COSTS
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ASSUMPTIONS UNDER RELEVANT COSTING
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RELEVANT COSTING AND ITS RELATION TO ACCOUNTING
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CONCEPTS
INFORMATION FOR DECISION MAKING

• Marginal cost. This refers to the increase in costs as a result of

producing one more unit or serving a customer. Managers use marginal
cost because it helps them split variable costs and fixed costs. Fixed
costs remain unchanged in the short run hence they don’t have impact
on the decision that a managers has to make

• Revenue acts like a map to help navigate your business to its future
and is the base for decisions to be made. Revenue costs helps managers
take steps for growth when they're most appropriate, steps to slow
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expansion when prudent, and adjust their business strategy when
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• Contribution. This is the amount of earnings after all direct costs have
been subtracted from the revenue. Contribution costs differentiate
between sales revenue and variable costs. It’s very vital for a manager
to know what sales revenue figures are and what variable costs are in-
order for them to make well informed decisions

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RELEVANT COSTING AND DECISION MAKING

KEY ASSUMPTIONS UNDER RELEVANT COSTING

Relevant costing assumes that cost behavioral patterns are
already known to a business. variable costs, semi fixed, semi
variable and ste costs behaviors are known and understood
Relevant costing assumes that a firm is able to speculate and
forecast on how the various decisions it makes, affect the sales
lrice, demand, fixed costs and variable costs figures with some
level of certainty.
Assumes any decisions and costs which aid in profit maximization
in the short-term are relevant. 5
DECISION MAKING ROCESS

Process 1 involves conducting a research on what decisions to make,

what are the firms short and long term goals and objectives and
identifying and addressing a problem for it is, not just its symptoms and
how all these variables have a bearing on the general health of the
business.

Process 2 involves evaluating the various options available to a firm and

their respective expected outcomes. In that, a decision is measured
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feasible meaning the firm is capable of implementing the decision to
fruition
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effectiveness, if the decision made, can solve the problem at hand
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consequences, the costs that the organization can incur as result of
selecting any if the alternatives
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Process 4 involves selecting the best alternative; among the suggested
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alternatives, a choice is made depending on the consequence of choosing
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Process 5 To implement the decision, the decision is now put into
practice in order to solve the problem at hand.
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Process 6 Obtain data about actual results, the managers now check
the outcome of the decision that was made
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Process 7 Compare actual results with the expected outcome.
Managers compare the objectives of the problem with the outcome,
meaning they check if the actual problem has been solved or not 8
TYPES OF DECISIONS MADE

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Operational occurs at the middle management level and involves
decisions that are more routine and day to day in anture
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Tactical decisions It involves decisions made by managers at the
lower or middle management level to imlement the strategic llans
and acheive operational objectives.
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Strategic Is the highest level of decision making and focuses on the
long term direction and overall strategy of the firm.

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RULES FOR IDENTIFYING RELEVANT COSTS

These are future incremental cashflows. The 3 general rules for

identifying relevant costs in summary;
FUTURE. What is past and what is future is determined by
reference to the time
at which the decision is being made. Only costs in the relevant
period of the project are considered. 
INCREMENTAL. The word incremental refers to financial changes
as a result of
the decision at hand. Only cashflows that are expected to change.
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RULES FOR IDENTIFYING FOR RELEVANT COSTS

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CASHFLOWS. Exclude any non-cash, or notional items from
consideration e.g.
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depreciation. Only cashflows that are expected to occur are
considered.
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Sunk costs are considered irrelevant because they have already
been incurred by the firm.
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Committed costs are considered irrelevant unless they cause or
bear an additional cost to the firm and ONLY the additional costs is
considered relevant.
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RELATIONS TO ACCOUNTING CONCEPTS

Accruals concept relevant costs are based on cashflows, which by

nature tend to be actual cash received and sent, rather than
accrual basis accounting which leans more to accounting for
non cash items such as depreciation and allocated fixed costs.

Reliability as one of the assumptions of relevant costing, relevant

costs should be reliable or show themselves for what the really
are, however relevant costs may not always be reliable. 12
RELATION TO ACCOUNTING CONCETS

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Completeness relevant costs should be compete as each and
every detail as an impact on how, which and what decisions are
made given available data.
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Going concern despite the assumption that the decisions made
by management are more inclined to ensuring that the business
continues operating, certain occurrences may leave
management no choice but to shut down operations and maybe13
THANK YOU AND GOD BLESS

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