Relevant Information for Decision Making
Relevance means that a factor should be
considered in making a decision.
relevant cost is a cost that is applicable,
pertinent, or logically related to making a
decision. In business, managers use the
concept of relevant costs in the allocation
Time is correlated with relevance.
costs to be relevant they must reside in
the future; historical costs are never
Further, the more distant in the future a
cost resides, the more likely it is to be
For example, in the long run,
certain fixed costs are likely to be
relevant; however, in the short run, most
fixed costs are not relevant.
Opportunity costs are benefits that are
alternative over another.
These costs are
difficult to identify because they do not
appear as “costs” in accounting records.
resources, managers may decide to
produce Product A rather than Product B.
An opportunity cost of this decision is the
lost contribution margin on Product B.
The lost contribution margin does not
appear in the accounting records as an
Sunk costs are costs that have already
been incurred; i.e., they are historical
Sunk costs are never relevant to
decisions because one a cost has been
incurred, it cannot be “unincurred.”
Outsourcing occurs when a firm chooses
to acquire necessary service functions or
materials from a supplier rather than
produce them in-house.
favoring outsourcing is controversial
because it often involves loss of jobs to
the organization electing to outsource.
the U.S., the outsourcing controversy is
even tenser because vendors selected in
outsourcing decisions often are foreign
companies. Thus, it can be argued that
outsourcing leads to the movement of
jobs from the U.S. to other countries.
A scarce resource is any input that
constrains production capacity. In the
short run, any constraint can be binding
and the tightest constraint changes over
For example, in a labor strike,
direct labor may be the most constrained
If a machine breaks down, the
conversion operation performed by that
machine may be the most binding
constraint on capacity, and if a supplier
becomes bankrupt, certain materials may
become the most binding constraint.
The object of changing the sales mix is to
increase the contribution margin (or total
profit) realized on the sale of a portfolio
The major factors that can
be manipulated to change product mix
are product prices, focus of advertising
and promotion, and the manner in which
sales personnel are compensated.
A special order decision involves the
analysis of a nonrecurring sale of products.
The typical circumstance involves the