Readers ask: In A Make Or Buy Decision, Which Costs Can Be Considered Relevant?

What costs are relevant to a make or buy decision?

Examples of relevant costs in the context of a make or buy decision include direct labor, direct materials, variable overhead. Other costs that should be considered in this category are any incremental costs necessary for a part manufacturing.

Which of the following is most likely relevant in a make or buy decision?

Which of the following is most likely relevant in a make-or-buy decision? In a make-or-buy decision, the original purchase price of equipment that is currently used in the manufacturing process is usually a relevant cost because the equipment can be sold for its salvage value. Fixed costs are always sunk costs.

What types of costs are relevant for decision making purpose?

Costs Influencing Decision-Making and Planning (9 Types)

  • Opportunity Cost: Opportunity cost is the cost of opportunity lost.
  • Relevant Cost:
  • Differential Cost:
  • Sunk Cost:
  • Imputed Cost:
  • Out-of-Pocket Cost:
  • Fixed, Variable and Mixed Costs:
  • Direct Cost and Indirect Cost:
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What kind of cost is always relevant?

Relevant costs are those costs that differ among the alternative courses of action. In some situations (such as make or buy) most variable costs would be considered relevant. However, there are many situations when some or all variable costs would be the same for two alternatives and therefore not be relevant.

What are examples of relevant costs?

They are examples of past (sunk) costs. The original costs are not avoidable and are common to all alternatives. The cost of the locks, the labour cost of fitting them, and the cost of delivery are differential cash flows that will be incurred if the doors are modified. They are therefore relevant costs.

What makes a cost relevant?

A relevant cost is a cost that only relates to a specific management decision, and which will change in the future as a result of that decision. The relevant cost concept is extremely useful for eliminating extraneous information from a particular decision-making process.

What is make buy decision explain with examples?

A Make or Buy Decision is a decision made to either manufacture a product/ service in house or buy it from outside suppliers (outsourcing) based on cost-benefit analysis.

What is the make-or-buy decision?

A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier.

When opportunity costs exist they are always relevant?

When opportunity costs exist, they are always relevant. When capacity is constrained, relevant costs equal incremental costs plus opportunity costs. If the $20,000 spent to purchase inventory could be invested an earn interest of $500, then the opportunity cost of holding inventory is $20,000.

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Are future costs relevant in decision-making?

Future costs are relevant in decision making if’ the decision will affect their amounts. It focuses on just that and ignores other costs which do not affect the future cash flows. Relevant costs are future costs that will differ among alternatives.

Does cost really matter in making decisions?

The cost information system plays an important role in every organization within the decision-making process. The detailed analysis of costs, the calculation of production cost, the loss quantification, the estimating of work efficiency provides a solid basis for the financial control.

Which of the following is an example of sunk cost?

A sunk cost refers to a cost that has already occurred and has no potential for recovery in the future. For example, your rent, marketing campaign expenses or money spent on new equipment can be considered sunk costs. A sunk cost can also be referred to as a past cost.

What kind of cost is never relevant?

Sunk costs are those costs that happened and there is not one thing we can do about it. These costs are never relevant in our decision making process because they already happened!

What is the difference between relevant and irrelevant cost?

Relevant costs are costs that will be affected by a managerial decision. Irrelevant costs are those that will not change in the future when you make one decision versus another. Examples of irrelevant costs are sunk costs, committed costs, or overheads as these cannot be avoided.

What is a relevant cost identify the two types of relevant costs?

The types of relevant costs are incremental costs, avoidable costs, opportunity costs, etc.; while the types of irrelevant costs are committed costs, sunk costs, non-cash expenses, overhead costs, etc.

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