Lecture_1C_Chapter_9_Relevant_cost_and_revenues

Lecture_1C_Chapter_9_Relevant_cost_and_revenues - Part...

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Use with Management and Cost Accounting 9e by Colin Drury ISBN 9781408093931 © 2015 Colin Drury Part Three: Information for decision-making Chapter Nine: Measuring relevant costs and revenues for decision-making 1 Lecture 1C Slides 1- 25
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Use with Management and Cost Accounting 9e by Colin Drury ISBN 9781408093931 © 2015 Colin Drury In costing, there are two types of costs namely relevant cost and irrelevant cost. Relevant cost is the cost that will make a difference between alternative courses of actions and will have a bearing on the decision made. Irrelevant cost is cost that will not make any difference regardless of which option is taken. In making decisions, what is important to the business in order to maximize profits, is the net benefit and reduced costs. RELEVANT INFORMATION: A KEY CONCEPT 2
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Use with Management and Cost Accounting 9e by Colin Drury ISBN 9781408093931 © 2015 Colin Drury 9.1 Relevant costs and revenues • The relevant financial inputs for decision-making are future cash flows that will differ between the various alternatives being considered. • Therefore only relevant ( incremental/differential ) cash flows should be considered. • Relevant costs and revenues are required for special studies such as: 1. Special selling price decisions. 2. Product-mix decisions when capacity constraints exist 3. Decisions on replacement of equipment. 4. Outsourcing (Make or buy) decisions. 5. Discontinuation decisions. 6. To sell at split point or further process. • Decisions should not be based only on items that can be expressed in quantitative terms — Qualitative factors must also be considered. 3
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Use with Management and Cost Accounting 9e by Colin Drury ISBN 9781408093931 © 2015 Colin Drury Basically, there are two methods: Total approach method — this method shows the actual amount under consideration listed under each option for consideration. Incremental approach method — this method shows the difference in costs and revenues of the alternative options given, whether increase or decrease from a base. Presentation of cost and revenue factors 4
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Use with Management and Cost Accounting 9e by Colin Drury ISBN 9781408093931 © 2015 Colin Drury Revenue / cost Revenue / cost classification classification Amount for Option Amount for Option 1 1 Amount for Option Amount for Option 2 2 Incremental benefits Incremental benefits and costs and costs Revenues common to both options A A Revenues unique to option 1 B -B Revenues unique to option 2 C C Costs common to both options D D Costs unique to option 1 E -E Costs unique to option 2 F F Net cost/benefit π 1 = (A+B)-(D+E) π 2 = (A+C)-(D+F) π 2 – π 1 = (C-B) - (F-E) Total and Incremental Approach 5
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Use with Management and Cost Accounting 9e by Colin Drury ISBN 9781408093931 © 2015 Colin Drury 9.2 1. Special pricing decisions • Special pricing decisions are typically one-time only orders and/or orders below the prevailing market price.
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  • Summer '13
  • student
  • Revenue, Colin Drury, Colin Drury ISBN

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