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Questions and Answers
What type of costs should be considered when making a decision?
What is an opportunity cost?
Which of the following is a non-relevant cost?
Why is it important to identify relevant and non-relevant costs?
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What should be calculated when the supply of a key resource is limited?
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Which of the following decisions requires the identification of relevant and non-relevant costs?
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What is a relevant revenue in short-term decision making?
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Which of the following is an example of an opportunity cost?
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What is a sunk cost in short-term decision making?
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Which of the following is a non-relevant cost for decision-making purposes?
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What is a committed cost in short-term decision making?
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Which of the following is a characteristic of a relevant cost?
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What is the allocated charge to cover office costs on the Rugby World Cup contract?
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When deciding whether to make or buy components, which of the following costs can be ignored?
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What is an example of a sunk cost?
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Which of the following is an opportunity cost?
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What is an example of a committed cost?
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Which of the following is not a relevant cost in the make or buy decision?
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Study Notes
Short-term Decision Making
- Relevant costs include future, cash, and incremental expenses, as well as opportunity costs, which are the benefits lost by taking an alternative decision.
Relevant Revenues and Costs
- Relevant revenue: results from a specific management decision and affects the future cash position of the business by receiving incremental revenue.
- Relevant cost: results from a specific management decision and affects the future cash position of the business by incurring incremental costs.
- Non-relevant revenue or costs: remain unchanged following a specific management decision.
Types of Non-Relevant Costs
- Sunk cost: has already been spent and is not a relevant cost as it will not change as a result of a management decision.
- Committed cost: has to be paid for, whether or not management makes a specific decision.
- Allocated cost: a non-relevant cost, such as an allocated charge to cover office costs.
Make or Buy Decision
- Only relevant costs need to be considered.
- Revenue is the same in both cases, so it does not need to be taken into account.
- Non-manufacturing overheads (allocated costs) can be ignored.
Non-Manufacturing Overheads
- Salaries and fringe benefits of selling, general and administrative personnel.
- Rent, property taxes, utilities for the space used by non-manufacturing functions.
- Insurance for areas outside of the factory.
- Interest on business loans.
- Marketing and advertising.
- Depreciation and maintenance of equipment and buildings outside of manufacturing.
- Supplies for the offices.
Site or Product Closure
- Decisions should be based on contribution analysis.
- Profitability vs. contribution analysis: Mumbai, Delhi, Calcutta sales revenue and costs.
Class Exercises
- Review exercises/quizzes from previous classes.
- Complete additional exercises on classes 2, 3, and 4.
- Attend class to ask questions and do additional exercises.
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Description
This quiz assesses your understanding of management accounting principles in short-term decision making. It covers the relevance of costs, make-or-buy decisions, product prioritization, process upgrades, and discontinuation of products or locations. Test your knowledge of management accounting concepts and their applications.
