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Relevant Cost Analysis for Job Bidding

OCC received a request to bid on a small job that needs to be completed next month. Yusef must determine which costs are relevant to consider for the job - direct research staff costs, IT costs, administrative costs, and job travel costs. Direct research staff costs and IT costs are irrelevant as they are mostly fixed. Administrative costs are also irrelevant as they are fixed. Job travel costs would be relevant to consider as they could be avoided if the job is not taken.

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Ava Das
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6 views1 page

Relevant Cost Analysis for Job Bidding

OCC received a request to bid on a small job that needs to be completed next month. Yusef must determine which costs are relevant to consider for the job - direct research staff costs, IT costs, administrative costs, and job travel costs. Direct research staff costs and IT costs are irrelevant as they are mostly fixed. Administrative costs are also irrelevant as they are fixed. Job travel costs would be relevant to consider as they could be avoided if the job is not taken.

Uploaded by

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

OCC recently received a request from a potential new client to bid on a small job that would need to be

completed next month. The business has excess research capacity, so taking the job would not affect
work on any other jobs. Yusef, OCC’s management accountant, has been asked to determine whether
each of the following costs is likely to be relevant to OCC and explain why: • direct research staff cost •
informational technology cost • administrative cost • job travel cost Cost Conclusion and explanation
Direct research staff cost Irrelevant. Research staff costs consist of salaries, which are fixed. Because the
business has excess research capacity, it is unlikely that the business would incur any incremental
research staff cost if the job is taken. Informational technology cost Irrelevant. IT costs consist primarily
of computer equipment, rent, utilities, and IT staff salaries. These costs are most likely fixed, and it is
unlikely that the business would incur any incremental IT cost if the job is taken. Administrative cost
Irrelevant. Administrative costs consist primarily of salaries, rent, office equipment, and utilities. These
costs are most likely fixed, and it is unlikely that the business would incur any incremental administrative
cost if the job is taken. Job travel cost Relevant. Any forecasted travel costs for the job would be
avoidable if the job is not taken, so the travel cost would be relevant when establishing a price and
deciding whether to accept the job. Management Accounting Chapter 5: Cost Behaviour and Job Costing
128 [Link] Qualitative information Relevant cost analysis focuses on decisions where the relevant cost
notion has an obvious application — in other words, the financial or quantitative effects of these
decisions. Equally important in all organizations are qualitative considerations when making decisions.
For example: • A manufacturer considering purchasing rather than making an important component may
continue to make the component for strategic reasons (such as preserving quality or ensuring timely
delivery of the component to a just-in-time manufacturing facility), even though an outside organization
may be able to supply the component at a lower cost. • An organization may decide not to abandon a
product even though a relevant cost analysis indicates it is unprofitable. It may continue to make the
product in order to capture marketing benefits of maintaining a full product line. • A manufacturer may
reject a special order that a relevant cost analysis indicates is financially attractive. Accepting the order
may create future expectations about prices that the manufacturer may wish to avoid. Quite often, these
qualitative factors that cannot be measured in financial terms will be given more weight than
quantitative factors, as the manager must consider the impact of costing decisions on the organization as
a whole. Therefore, the important qualitative factors to consider should be included in each relevant cost
decision. 5.5.2 Opportunity costs and sunk costs An opportunity cost is not a cost in the traditional sense
because it does not involve the outlay of funds — it is a benefit foregone when choosing one alternative
over another. Opportunity costs do not appear on the income statement, but they are relevant to
decision-making because they change differential income. Consider a manufacturing business that has
100 hours of machine time available. This machine time can be used to produce 50 units of Product A,
which would produce an incremental profit of $1,000, or 75 units of Product B, which would produce an
incremental profit of $1,200. This $1,200 is the profit that could have been earned had the business
produced Product B; however, if it chose Product A, this profit is “lost” and is considered an opportunity
cost. The opportunity cost of using the machine time to produce Product B is $1,000, that is, the lost
profit from not producing Product A, as follows: Make Product A Make Product

Common questions

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Qualitative factors should sometimes be prioritized because they encompass strategic and long-term considerations that quantitative analyses may overlook. These include quality control, market expectations, and maintaining product lines for brand reputation, which can have substantial implications for the organization's future positioning and success .

Informational technology costs are classified as irrelevant because they are primarily composed of fixed costs such as computer equipment, rent, utilities, and salaries. Since these expenses will not change with the addition of a new job, they do not affect the decision to accept the job .

Qualitative factors can heavily influence decision-making, as they address strategic concerns like quality, future market expectations, or maintaining a product line for marketing benefits. These considerations may outweigh quantitative analyses because they impact the organization's long-term goals and market positioning beyond immediate financial gains .

Opportunity costs affect decision-making by representing the benefits foregone when choosing one alternative over another. For instance, deciding between producing different products with limited resources can highlight potential profits lost by not selecting more profitable options. Although these costs do not involve direct financial outlays, they are significant as they affect differential income, providing insights that influence strategic choices .

Sunk costs differ from opportunity costs as they involve past expenditures that cannot be recovered and should not impact current decision-making. In contrast, opportunity costs reflect potential benefits lost by choosing a particular course of action. Ignoring sunk costs is vital because including them can lead to decisions that are not aligned with maximizing future benefits .

Administrative costs are deemed irrelevant as they are typically fixed and encompass salaries, rent, and utilities. These costs do not fluctuate with the acceptance of a new job and therefore do not impact the decision-making process related to the job .

A manufacturer might continue in-house production despite lower external costs due to strategic reasons, such as ensuring quality control, avoiding dependency on external suppliers, safeguarding proprietary processes, or maintaining delivery schedules crucial for just-in-time production systems. These factors ensure operational continuity and protect competitive advantages .

Travel costs are considered relevant because they would only be incurred if the new job is accepted. Since these costs are avoidable if the job is not undertaken, they directly influence the financial evaluation of the job .

The direct research staff cost is considered irrelevant because these costs are fixed salaries and will not change with the addition of the new job. Since OCC has excess research capacity, taking the job would not require additional research staff expenses .

Opportunity cost plays a crucial role by quantifying the profit or benefit lost when choosing one manufacturing option over another. In scenarios where resources are limited, such as machine time, opportunity costs help determine the most economically beneficial choice, guiding firms to use their resources in the most profitable manner .

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