Note re Relevant Cost Concept

Note re Relevant Cost Concept - ACCT2460 Supplementary...

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ACCT2460 Supplementary Notes re Chapter 7 Relevant or Incremental Costs and Special Decision Making Most businesses have to make what are called “non-routine” or special decisions on an ongoing basis. Examples: Accept v. Reject a Special Order at less than the normal selling price Keep v. Drop a product line, division, customer etc. Make inside v. Buy outside a part or component used by the business in its operations Keep v. replace a piece of equipment Sell a product as is v. process it further and then sell it These decisions typically involve two or more alternatives. The approach taken is to focus only on those costs and revenues that are relevant to the decision at hand. A cost (or revenue) is relevant to the decision if it meets the following criteria: 1. It relates to the future (i.e., the amount has not already been incurred and spent) 2. It differs among the various alterative choices. If a cost or revenue item meets both of these criteria, it is relevant to the decision and the amounts
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