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Relevant Cost Analysis Explained

The document discusses considerations for relevant cost analysis. It notes that while variable costs are generally relevant, some variable costs like electrical power requirements may not be if they are the same between alternatives. Fixed costs can also be relevant, such as modifications required for a new machine. Batch-level cost drivers, opportunity costs, time value of money, and other qualitative factors should also be included in the analysis. Depreciation is not usually included except for tax implications.

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3 views2 pages

Relevant Cost Analysis Explained

The document discusses considerations for relevant cost analysis. It notes that while variable costs are generally relevant, some variable costs like electrical power requirements may not be if they are the same between alternatives. Fixed costs can also be relevant, such as modifications required for a new machine. Batch-level cost drivers, opportunity costs, time value of money, and other qualitative factors should also be included in the analysis. Depreciation is not usually included except for tax implications.

Uploaded by

mohamedawny123
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Relevant costs can be variable or fixed, but variable costs are generally

relevant while fixed costs are not.



Occasionally, some variable costs are not relevant.

For example, assume that a manager is considering whether to replace or repair an old machine.
If the electrical power requirements of the new and old machines are the same, the variable cost of
power is not relevant.

Some fixed costs can be relevant.

For example, if the new machine requires significant modifications to the plant building, the cost
of the modifications (which are fixed costs) are relevant because they are not yet committed.

..

* Relevant Cost Analysis ( Additional
Considerations )

1. Batch-level Cost Drivers
Batch-level cost drivers should be considered in relevant cost analysis.

For example, if setup on one machine takes longer and requires more skilled labor than the other
machine, these factors should be included in the analysis

2. Fixed Costs and Depreciation
Depreciation is not included in relevant cost analysis except when considering tax implications.

















3. Other Relevant information : Opportunity Costs

- Opportunity costs : the benefit lost when one chosen option precludes the benefits from an
alternative option, should also be considered in the analysis of alternative options

- For example, addition of a new product could cause reduction, delay, or lost sales in other
product areas

- Time-value of money is relevant when deciding among alternatives with cash flows over two or
more years.

- Other qualitative factors to be considered :

A- Differences in quality B- Functionality C- Timeliness of delivery

D- Reliability in shipping E- After-sale service level..

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