Relevant Costing

Relevant costing aids management in making non-routine decisions by analyzing relevant costs and benefits.

Not all costs are useful in decision-making. Relevant costs refer to those that will differ between different alternatives. Irrelevant costs are those that will not cause any difference when choosing one alternative over another.

Non-routine decisions include: make or buy a product component, accept or reject a special order, sell or process further, add or drop a product line, and optimum product combination.

In this unit, we will learn how to apply concepts of relevant costs in making non-routine decisions.

Lesson 1

Relevant and Irrelevant Costs

Costs, when classified according to usefulness in decision-making, may be classified into relevant and irrelevant costs. Relevant costs refer to those that will differ between alternatives. Read more..
Lesson 2

Types of Non-Routine Decisions

Tactical decisions may be repetitive or non-repetitive (non-routine). Examples of non-routine decisions are: make or buy decision, accept or reject a special order, sell or process further, add or drop a product line, and scarce resource utilization. Read more..
Lesson 3

Accept or Reject a Special Order

When faced with the situation, a business should properly decide whether to accept or reject the special order. The rule is to accept the order if benefits exceed costs. Read more..
Lesson 4

Make or Buy Decision

Businesses are sometimes faced with a decision to choose between buying a product that it uses in its operations and making such product. In relevant costing, the decision to make or buy a product component depends upon the analysis of costs. Read more..
Lesson 5

Sell or Process Further

There are times when manufacturing businesses become faced with the decision to sell a product at its current state or process it further and sell for a higher price. The management must choose the option that will result in higher profits. Read more..
Lesson 6

Add or Drop a Product Line (or Segement)

Some product lines or business segments tend to under-perform compared to others. In deciding whether to add a new product line or drop an existing one, the management must consider relevant costs. Read more..
Lesson 7

Product Combination: Scare Resource Utilization

When faced with a decision to choose which product/s to produce under limited resources, the business should choose that or those that will result in greater profits. In this lesson, learn how to determine the optimum product combination. Read more..
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