Podcast
Questions and Answers
Which of the following costs is LEAST likely to be considered relevant when making a business decision?
Which of the following costs is LEAST likely to be considered relevant when making a business decision?
- A replacement cost for outdated equipment.
- A future outlay required for a new project.
- A past cost that has already been incurred. (correct)
- An opportunity cost of choosing one option over another.
What is the primary difference between a sunk cost and an opportunity cost?
What is the primary difference between a sunk cost and an opportunity cost?
- A sunk cost is a cost already incurred and cannot be recovered, while an opportunity cost is the benefit foregone when choosing one alternative over another. (correct)
- A sunk cost is easily quantifiable, unlike an opportunity cost which is subjective and difficult to measure.
- A sunk cost is relevant to future decisions, while an opportunity cost is not.
- A sunk cost involves future outlays, whereas an opportunity cost reflects past expenditures.
Which statement best describes 'committed costs'?
Which statement best describes 'committed costs'?
- Costs that may influence decision-making but are difficult to quantify.
- Costs that can be recovered if a project or activity is discontinued.
- Costs that an organization is obligated to pay, regardless of the decision made. (correct)
- Costs that fluctuate with the level of production or sales.
What are the three key attributes that a cost must possess to be considered a relevant cost?
What are the three key attributes that a cost must possess to be considered a relevant cost?
A company is deciding whether to upgrade its machinery. Which of the following factors should be considered an irrelevant cost in their decision-making process?
A company is deciding whether to upgrade its machinery. Which of the following factors should be considered an irrelevant cost in their decision-making process?
A business has the following data: Fixed Costs = $50,000, Selling price per unit = $25, Variable cost per unit = $15. What is the break-even point in units?
A business has the following data: Fixed Costs = $50,000, Selling price per unit = $25, Variable cost per unit = $15. What is the break-even point in units?
How do variable costs behave in relation to changes in production volume?
How do variable costs behave in relation to changes in production volume?
What is the MOST important objective of preparing a cash budget?
What is the MOST important objective of preparing a cash budget?
Why is a cash budget considered to reflect the 'whole business' more than many other single budgets?
Why is a cash budget considered to reflect the 'whole business' more than many other single budgets?
A company wants to achieve a target profit of $25,000. Their fixed costs are $75,000, selling price per unit is $50, and variable cost per unit is $25. How many units must they sell to achieve their target profit?
A company wants to achieve a target profit of $25,000. Their fixed costs are $75,000, selling price per unit is $50, and variable cost per unit is $25. How many units must they sell to achieve their target profit?
Flashcards
Outlay costs
Outlay costs
Money that will have to be spent to achieve a particular objective.
Future committed cost
Future committed cost
Payment is committed to and will be made regardless of decision.
Opportunity costs
Opportunity costs
Benefit foregone as a result of pursuing one course of action rather than pursuing the best alternative course of action.
Sunk cost
Sunk cost
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Relevant cost
Relevant cost
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Irrelevant cost
Irrelevant cost
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Break-Even Point (BEP):
Break-Even Point (BEP):
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Fixed Costs:
Fixed Costs:
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Variable Costs
Variable Costs
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Objective of the cash budget
Objective of the cash budget
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Study Notes
- Relevant costs include future outlay, opportunity, and replacement costs.
- Irrelevant costs include historic/sunk/past and committed costs.
- Opportunity costs are the benefits foregone when choosing one course of action over the best alternative.
- Outlay costs are the money required to achieve a specific objective.
- Past ('historic'/sunk) costs are payments already made.
- Future committed costs are payments that will be made regardless of the decision.
Relevant Costs
- To be relevant, a cost needs three attributes.
- Must relate to the objectives of the decision, such as wealth enhancement for businesses.
- Must differ between the options under consideration.
- Must be future-related costs and benefits.
Sunk Cost vs. Opportunity Cost
- Opportunity cost is the benefit foregone from pursuing one action instead of the best alternative.
- Sunk cost is a past cost and therefore irrelevant when thinking about future decisions.
Committed Cost
- Can be considered a past cost, even if payment is in the future, as it arose from an irrevocable decision.
- Never considered a relevant cost for decision-making.
- Rental/lease agreements are an example.
Conclusion
- Relevant costs are applicable to a specific decision (e.g., opportunity cost, outlay cost).
- Irrelevant costs are not applicable to a particular decision (e.g., sunk cost, committed cost).
Fixed & Variable Costs
- Fixed costs remain constant regardless of production volume.
- Variable costs change based on production; they increase when production increases and decrease when it decreases.
Break-Even Point (BEP)
- BEP is where there is no profit or loss.
- BEP occurs when total contribution (sales per unit - variable costs per unit) covers fixed costs.
- Purpose of BEP is to help compare planned activity levels and assess risk.
- Contribution Per Unit [CPU] = Selling price/Unit – Variable costs/Unit
- BEP/units = Total Fixed Costs / CPU = TFC / CPU
- Target units = (TFC + Target profit) / CPU
Preparing Cash Budgets
- The objective is to ensure sufficient cash is always available.
- Allows identification of shortages in advance
- Enables bank loans to meet deficiencies.
- Reflects the whole business.
- Facilitates co-ordination, motivation, future focus, control, and authorization.
- Helps avoid surplus cash by taking steps to invest in short-term investments.
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