BIAYA RELEVAN part 1

Summary

This video covers differential accounting information used in decision-making, focusing on relevant costs for choosing between alternatives. It explains key concepts such as future costs, differential income, and opportunity costs, providing examples like whether to cook food in-house or outsource. The speaker emphasizes the importance of relevant costs in selecting the most profitable option for a business. Other topics include avoidable costs and sunk costs, which are also critical in making informed financial decisions. The video aims to help businesses minimize risks and maximize profits through careful analysis.

Takeaways

• 🧾 Differential accounting information is crucial for decision-making, particularly when selecting between alternatives.
• 🧑‍🍳 A common example is a catering company deciding between making all ingredients in-house or purchasing some from external suppliers.
• 💰 The most cost-effective alternative, based on relevant costs, is chosen to maximize company profits.
• 📉 Relevant costs are future costs that differ across various alternatives and should be the primary focus when making decisions.
• 🔄 Differential accounting involves comparing projected revenues, costs, or assets across different alternatives.
• 💸 Differential revenue refers to the income difference between two choices, while differential costs refer to the cost difference between them.
• 🏢 In business, management often faces decisions involving differential accounting to minimize risks and maximize profits.
• 💡 Opportunity costs refer to potential earnings lost by choosing one alternative over another.
• 🚗 Avoidable costs are those that can be eliminated by choosing a different alternative, like repair costs when buying a new car instead of a used one.
• 🕰️ Sunk costs are past costs that cannot be recovered and should not influence future decisions.

Q & A

What is meant by differential accounting information for decision making?

Differential accounting information for decision making refers to the data about costs and revenues that differ among various alternatives. It is used to evaluate and choose the most beneficial alternative for the company.

What are relevant costs, and why are they important in decision-making?

Relevant costs are future costs that differ between alternatives. They are crucial in decision-making because only costs that change between options should be considered to ensure that the selected alternative minimizes costs or maximizes benefits.

What is the difference between differential costs and irrelevant costs?

Differential costs vary between alternatives and influence the decision-making process, while irrelevant costs remain the same regardless of the chosen alternative and do not affect the decision.

What is an example of a differential cost in a business scenario?

An example is choosing between making all components of a meal in-house or buying some from an external vendor. If making in-house costs $100 and buying costs $90, the differential cost is $10, which helps the business decide which option is more cost-effective.

What is opportunity cost, and how does it apply to business decisions?

Opportunity cost is the potential benefit lost when one alternative is chosen over another. For example, if a company chooses to use its premises for its own operations instead of renting them out, the opportunity cost is the rental income it forgoes.

What is meant by 'avoidable cost' and 'unavoidable cost'?

Avoidable costs are expenses that can be eliminated if a particular alternative is chosen, while unavoidable costs remain the same regardless of the chosen alternative. For instance, if a company buys a new car, the maintenance cost of the old car becomes avoidable.

How does differential revenue influence decision-making?

Differential revenue is the difference in revenue between two or more alternatives. It helps businesses assess which option provides higher returns and should be selected.

What is sunk cost, and should it be considered in decision-making?

Sunk cost refers to costs that have already been incurred and cannot be recovered, such as money spent on equipment that is no longer usable. Sunk costs should not be considered in decision-making as they do not affect future choices.

Why is it important for managers to understand differential accounting?

Understanding differential accounting helps managers make informed decisions by focusing on relevant data that impacts future costs and revenues, ultimately aiding in selecting the best alternative to achieve business goals.

How does differential accounting differ from financial accounting?

Differential accounting focuses on providing information for internal decision-making, such as evaluating costs and revenues of different alternatives. Financial accounting, on the other hand, follows standard accounting principles to prepare financial statements for external stakeholders.