ACCA PM Syllabus C. Decision-making Techniques - Concept of Relevant Costing - Notes ^{1 / 3}

Any short term decisions should be approached using relevant costing principles

Companies and government bodies have increasingly tended to concentrate on their core competences – what they are really good at – and turn other functions over to specialist contractors.

This is known as outsourcing or sub-contracting.

Relevant costs and revenues are:

In the FUTURE
CASH only
INCREMENTAL only

Decision making should be based on relevant costs and revenues.

Relevant costs are FUTURE costs.
A decision is about the future and it cannot alter what has been done already.
Costs that have been incurred in the past are totally irrelevant to any decision that is being made 'now'.
Such costs are called past costs or sunk costs and are irrelevant.
Relevant costs are CASHFLOWS.
Only cash flow information is required.
This means that costs or charges which do not reflect additional cash spending (such as depreciation and notional costs) should be ignored for the purpose of decision making.
Relevant costs are INCREMENTAL costs and it is the increase in costs and revenues that occurs as a direct result of a decision taken that is relevant.
Common costs can be ignored for the purpose of decision making.
Relevant costs are AVOIDABLE costs
These are costs which would not be incurred if the activity to which they relate did not exist.
Therefore, they are relevant to a decision.

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Committed costs are future costs that cannot be avoided because of decisions that have already been made.

These are non-relevant costs

Opportunity Costs

Opportunity costs only arise when resources are scarce and have alternative uses.

When an alternative course of action is given up, the financial benefits lost are known as opportunity costs.

So they are the lost contribution from the best use of the alternative forgone.