Accounting - Modules 2



Module 2 - Case Relevant Cost Case Behemoth Motors Corp

Case: Relevant Costs in a Decision-Making

One of the most essential task that successful manager has is to make accurate decision for company. Each decision taken by managers comprises of choices between no less than two alternatives. The process of decision perhaps intricate through volumes of data, incomplete information, irrelevant data and others unlimited alternatives collection. Managerial Accountant role in this process is frequent that of gathering and summarizing the relevant information instead of decisive decision maker (Blocher, 2011).

The cost and benefits of the each option requires a comparison prior making a conclusion. It is recommended that company should make their decision on relevant information which comprises of future costs predication and predication of revenues and these varies among options. Any cost and benefit which do not vary among options are consider as irrelevant and could be overlooked in a decision. Costs that are previously irrevocably incurred are termed as Sunk Costs. These are constantly irrelevant because they would be similar for each alternative (Michael & Cecily, 2011).

The relevant costs in multi-national decision-making has been termed as expected future costs that differ among alternative courses of action and resources and can be highlighted if you change or delete any economic activity. Relevance is not an attribute of a particular cost; the same cost may be a circumstance relevant and irrelevant in another. The specific facts of a given situation will determine what costs are relevant and which irrelevant. When there is the demand of a special order, spare capacity exists in this case, the only costs that change if we accept the order are the raw material, energy, freight, etc. The depreciation of the equipment remains constant, so that the former are relevant and irrelevant to the second decision. Relevant costs could be direct material, direct labor, direct expenses and indirect costs that are linked with the specific product (Izhar & Hontoir, 2011).

These can be further explained as below:

Incremental costs: Incremental costs increases or decrease the total cost, or change in any element of the cost, generated by a change in the operation of the company. These costs are important in the process of decision making, they are the ones that will change or sustained movements in the profits of the company before a special order, a change in the composition of lines, a change in inventory levels, etc.

Decremental costs: When costs are generated by differential reductions or reductions in the volume of transaction, called decremental cost. For example, when you delete a line from the current composition of the company you cause decremental costs.

Incremental costs: are those incurred when the cost variations are caused by an increase in the activities or operations of the company, a typical example is the introduction of a new line to the existing composition, which will bring the occurrence of certain costs that are called incremental (Jawahar-Lal, 2011).

Submerged Costs: Submerged Costs are those that whatever course of action is chosen, ...