RELEVANT COSTING
Relevant Cost is useful for decision Making.
Future
Incremental
Cash Flow
Adjust based on situation for commercial decision making.
Relevant Cost are
Avoidable cost
Differential Cost
Opportunity cost
Relevant costs are not
Sunk Cost
Committed cost
Apportioned
Material
Regular Use-Current replacement cost (for required quantity of the contract)
Not Regular Use, not purchased- Current replacement cost
Not Regular use, purchased-Opportunity cost- Higher of Current resale value and value
from alternative use.
Disposal Costs- Avoiding disposal cost results in relevant saving
Labour
Idle time – not relevant
No Spare capacity: Direct Labour cost + opportunity cost
VPOHs (Variable Production Overheads)
Based on extra working hours
Note: Its is common to calculate relevant cost of labour & VPOHs together
Non- Current Assets
Depends on
Already Purchased?
Common asset or specific assets?
Operating capacity
No Spare capacity: Opportunity costs
Assuming payment is not yet done:
Common asset Specific asset
Purchase price Not relevant Relevant
Running costs Not relevant; Relevant
Any extra costs are relevant
Disposal costs Not relevant; Relevant
Any extra costs are relevant
Disposal proceeds Not relevant; Relevant benefit
Any lose are relevant
Operating capacity
Spare Capacity available: fall in realizable value
No spare capacity: deprival value
Deprival Value
Deprival value is the lower of
Value in use
Replacement cost
Value in use is the higher of:
NRV
Economic value (present value of expected future cashflows)
* Economic value is same as opportunity cost
Fixed Costs
Unless indication to the contrary assume:
fixed costs are common and therefore irrelevant
Only incremental fixed costs are relevant.
Common FC Irrelevant Apportioned
Specific FC Relevant Allocated
Stages of absorption:
Allocation Specific
Apportionment Common
Absorption
