The relevant costs and benefits of decision making in a company

The costs which should be used for decision making are often referred to as "relevant costs". Elements of a decision A quantitative decision problem involves six parts: a An objective that can be quantified Sometimes referred to as 'choice criterion' or 'objective function', e.

importance of relevant cost in decision making

Since this order would have no effect on other sales and since the company has idle capacity, then only incremental costs and benefits are relevant. As a general rule, it is always profitable to continue processing a joint product after the split-off point so long as the incremental revenue exceeds the incremental processing costs.

This requires conversion of contribution margin per unit to a more specific level e. Accept or reject a special order. Exercise 5. As long as rebuild costs are recovered through sale of the product, and rebuilding does not interfere with normal production, we should rebuild. Should the special order be accepted?

relevant cost for decision making exercises

Other important business decisions are whether to source components internally or have them brought in from outside, and whether to continue with operations if they appear uneconomic.

Buy Make vs. What is sunk cost in manufacturing? The relevant costs are the costs that can be eliminated due to the closure, as well as the revenue lost when the stores are closed. The underlying principles of relevant costing are fairly simple and you can probably relate them to your personal experiences involving financial decisions.

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Relevant Cost Definition