Relevant Costing

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Mind Map on Relevant Costing, created by Sue Evans on 20/05/2017.
Sue Evans
Mind Map by Sue Evans, updated more than 1 year ago
Sue Evans
Created by Sue Evans over 7 years ago
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Relevant Costing
  1. Joint Products
    1. A joint product should be processed further past the split-off point if additional sales revenue exceeds the relevant further processing costs
      1. The apportionment of joint processing costs is irrelevant to the decision
        1. Qualitative Factors
          1. impact on employees, customers, competitors and suppliers
        2. Opportunity Cost
          1. Benefit foregone by choosing one option instead of another. This normally includes contribution/profit lost
          2. Make or Buy (Outsourcing)
            1. Without scarce resources
              1. The relevant costs of the decision are the differential costs between making and buying
                1. 1) Calculate total saving by making in-house 2) Calculate total Attributable Fixed Cost by making in house 3) Calculate the Net Cost/Saving and make decision based on this
              2. With scarce resources
                1. The units made in-house have the highest saving per unit of scarce resource
                  1. 1) Calculate saving per unit by making in-house 2) Calculate the saving per unit of limited resource 3) Rank the products in priority of making in-house
                2. Qualitative Factors
                  1. Quality of bought in product, Reliability of supplier Possibility of becoming dependent on supplier, Likelihood of future price increases, How to use spare capacity, Confidentiality issues
                3. Shut Down (Outsourcing)
                  1. Qualitative Factors
                    1. Impact on employee morale, Signal given to competitors, Customer loss of confidence, Damage to suppliers’ business
                    2. Relevant Cash Flows
                      1. Lost contribution, Savings of fixed costs, Penalties and payments, Reorganisation costs, Redundancy Costs, Annual operating costs, Non-current assets to sell
                    3. Minimum Economic Bid Pricing
                      1. The minimum economic bid price of an order is simply the minimum price which would give a break-even situation
                        1. The minimum economic bid price is a starting price on which to base a selling price or profit mark up.
                        2. Materials
                          1. Not in inventories - current replacement value
                            1. In inventories held
                              1. No use for them - current resale values if any value
                                1. In continual use - current replacement value
                                  1. Scarce (cannot be replaced) - opportunity cost
                                2. Labour
                                  1. Spare Capacity - no cost
                                    1. Full Capacity
                                      1. Hire more staff
                                        1. Current rate of pay or cost of hiring
                                        2. Cannot hire more staff
                                          1. Variable cost & lost contribution
                                      2. Sunk Costs
                                        1. a past (historical) cost which is not directly relevant in decision making
                                        2. Committed Costs
                                          1. a future cost which cannot be recouped
                                          2. Costs and revenues are relevant if they are future, incremental and cash flows. Relevant costs also include opportunity costs
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