![]() ![]() Maintenance cost for machinery is $3,000, $2,000 for material, $2,500 for labor, and $1,500 for miscellaneous costs. The company Billy’s makes cheese worth $10,000 per month. Appropriate cost analysis form plays a primary role in making that decision. Here, the management needs to consider whether the units are making expected income or have high maintenance costs. #2 – Continue Production or Close Business UnitĪ major dilemma regarding any business at some point is whether to continue operation or close business units. Therefore, XYZ should continue outsourcing. And it will cost $390,000 to make the same internally. By producing internally, the company incurs the following costs:Īccording to the above illustration, it will cost XYZ $250,000 to buy from a supplier. The company requires 50,000 units of spare parts per annum. ![]() But the company can make the same piece internally as well. Purchasing from a supplier costs $5 per unit. XYZ Company manufactures motor vehicle spare parts that need a specific piece of equipment. The relevant cost analysis thus helped the company to conclude that buying the part was a more financially sound decision. The management can outsource to make an extra income from leased space. The company shall free some space that can be leased if it decides to outsource. ![]() They constitute an integral part of the supply chain management for providing raw materials to manufacturers and finished goods to customers. It receives payments in exchange for making items available to end-users. They can buy the part from a vendor Vendor A vendor refers to an individual or an entity that sells products and services to businesses or consumers. Suppose a company wants a part of some machine. read more are examples of the make or buy situation. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc. read more, direct labor, and various overhead costs Overhead Costs Overhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Direct materials Direct Materials Direct materials are raw materials that are directly used in the manufacturing process of a company's goods and/or services and are an essential component of the finished goods manufactured. Naturally, the lowest cost alternative is the best. The company has to decide whether to make the parts internally or outsource Outsource Outsourcing refers to contracting out specific business processes to a third-party or specialized service provider, i.e., an individual or company. Close a business unit or continue production.Ī company that deals with making finished goods requires specific parts. ![]() The three main types of relevant cost examples considered during a business decision are: Relevant cost of Material C =100 units x $23=$2,300 How Relevant Cost is used in Decision Making? $30 per unit is not relevant since the current price is $23. Hence, relevant cost of material B = $2,250 + $2,000 We assume the units in inventory will not be used-the selling price at $13. read more may be avoided by deciding not to perform a certain activity. Thus, incurring an expense Expense An expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital. read more, which refers to the expenses already incurred. However, this does not imply that such costs will be irrelevant for an extended period and may become relevant if the business environment or priorities change. read more or irrelevant costs Irrelevant Costs Irrelevant costs are those that are not useful or are not considered when a company makes a business decision. The opposite of relevant costs is sunk cost Sunk Cost Sunk costs are all costs incurred by the firm in the past with no hope of recovery in the future and are not considered while making any decisions since these costs will not change regardless of the decision's outcome. Businesses use relevant costs in management accounting to conclude whether a new decision is economical.Ī particular cost may be relevant for one situation but irrelevant for another. This concept is useful in eliminating unnecessary information that might complicate the management’s decision-making process. Relevant cost is a management accounting term that describes avoidable costs incurred when making specific business decisions. ![]()
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