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.

What's in Here

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

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 optimal product combination.

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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.
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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.
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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.
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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.
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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.
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Lesson 6

Add or Drop a Product Line (or Segment)

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.
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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.
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