Chapter 11 AMAC

What is relevant costing?

Relevant costing is used to appraise short-term decisions

What is key factor analysis?

It considered situations but only a certain amount of a resource is available in the short term and management must decide how to allocate in the most profitable way

Short-term decision-making versus long-term decision-making

• Time frame—> short term is less than one year long-term is for a year or more

• Capital investment—> only required for long term decision

• Risk—> short-term decision-making is less risky than long-term decision-making as a short term is more accurate because of less uncertainty

What are the three characteristics of relevant costs?

• Future—> the cost will be incurred in the future because of the decision being made

• Incremental—> this cost is only incurred as a result of the decision being made

• Cash flow—> the cost reflects additional cash spending

What is important in make or buy decisions?

• All variable costs

• Fixed costs that would be avoided if the product was not being made

What should you consider for shut down decisions?

net of the loss in contributions and the savings of fixed

Advantages and disadvantages of buying in

Advantages:

• cost saving due to flexibility

• Expertise in external organisations, can’t get in own firm

• Resources can be diverted to more value adding activities

Disadvantages:

• Control of operation is lost

• Quality could be impacted

• Reliability could drop

• Skills are lost in house making it difficult difficult to come back if required

• Employees made redundant negatively impacting morale

3 non financial considerations of shut down decisions

• Staff morale dropping because of other staff being made redundant

• Customers may switch to competitors once product is discounted which reduces market share

• Suppliers reliant on organisation may go out of business.

What is market share constraint

Sales demand limiting the amount of sales volume generated