Video Assignment 03 Relevant Costing Video

Summary

The lesson covers relevant costing, a key concept in decision-making that compares future costs between different activities. It explains differential costs, incremental and avoidable costs, and other concepts like traceable, replacement, opportunity, and sunk costs. The lesson uses simple examples, such as receiving special orders and choosing between college or work, to explain these cost types. The process for analyzing problems is outlined, focusing on evaluating alternatives both quantitatively and qualitatively. The instructor encourages students to prepare for upcoming problem-solving sessions using these concepts.

Takeaways

• 📚 Relevant costs, also called differential costs, represent the expected changes in future costs due to changes in activity levels.
• ⚖️ Differential costs are the difference between the total costs of two alternative actions in decision-making.
• ⬆️ Incremental costs occur when there is an increase in activity or volume, while avoidable costs arise when there is a decrease in activity.
• 🍪 Traceable costs are directly identifiable with a specific product, department, or division, such as the cost of chocolate chips in baking cookies.
• 🔄 Replacement costs are incurred when replacing old systems or assets with new ones.
• 🎓 Opportunity costs represent the benefits forgone by choosing one course of action over another, such as going to college versus working.
• ⛔ Sunk costs are past expenditures that cannot be recovered and are irrelevant to future decision-making.
• 💸 Out-of-pocket costs refer to unbudgeted or unexpected personal expenses.
• 📊 Relevant costing is used in evaluating alternatives for decision-making, such as make-or-buy decisions and evaluating supply, demand, or price analysis.
• 📝 The process of relevant costing involves defining the problem, identifying alternatives, weighing quantitative and qualitative consequences, and making a decision.

Q & A

What is the definition of relevant costs, also known as differential costs?

Relevant costs, or differential costs, are the expected changes in future costs when shifting from one level of activity to another. They represent the difference in total costs between two alternative courses of action and are used in decision-making.

How are incremental costs and avoidable costs related to changes in activity or volume?

Incremental costs occur when there is an increase in activity or volume, representing the additional costs incurred. Avoidable costs occur when there is a decrease in activity or volume, and they represent the costs that can be avoided when no longer operating at a higher level.

What is a traceable cost, and can you provide an example?

A traceable cost is directly attributable to a specific product, job, department, or operating division. For example, the cost of chocolate chips in a cookie business is a traceable cost, as it can be directly identified with the production of cookies.

What are replacement costs, and when are they incurred?

Replacement costs are incurred when something in the old system is replaced with a new one. These costs are associated with upgrading or substituting outdated resources or equipment with more current alternatives.

What is an opportunity cost, and how does it impact decision-making?

Opportunity cost represents the measurable benefit forgone by choosing one alternative over another. For example, if you choose to attend college rather than getting a job, the opportunity cost is the salary you could have earned if you had taken the job.

What is a sunk cost, and why is it considered irrelevant for future decisions?

A sunk cost is an unrecoverable cost that has already been incurred and cannot be changed. These costs are considered irrelevant in future decision-making because they do not affect future actions or outcomes. For example, the original cost of a machine bought for 800,000 pesos after two years is a sunk cost.

What are out-of-pocket costs, and how do they differ from other costs?

Out-of-pocket costs refer to unbudgeted expenses or cash disbursements, often personal in nature. They differ from other costs because they are typically unexpected or not part of planned expenditures, such as emergency personal expenses.

What are some examples of problems that involve evaluating only costs in relevant costing?

Examples include method change problems (evaluating alternative processes), make-or-buy decisions (comparing costs of raw materials or inputs), and order quantity problems (analyzing profits at different levels of quantity or volume).

What types of problems in relevant costing require evaluating both costs and revenues?

Problems requiring evaluation of both costs and revenues include supply and demand analysis (break-even points), contribution pricing (analyzing contribution margins and variable costs), and decisions related to discontinuing a product or adding services.

What are the general steps in analyzing problems in relevant costing?

The steps include: 1) Defining the problem and its impact on the business, 2) Identifying alternative solutions, 3) Weighing the quantitative consequences of each alternative, 4) Evaluating qualitative effects, and 5) Reaching a decision based on the analysis.