Unfortunately the most accurate accounting information is in most instances historical and therefore of very little significance for internal decision making. While it may sound trivial, knowing how much it costs to make a product is extremely useful information about your business. The standard costing phenomenon is, however, often conceived as overly complex. The relevant costs associated with noncurrent assets, such as plant and machinery, are determined in a similar way to the relevant costs of materials. If you want updated videos with working links try this playlist.
Relevant costing aids management in making nonroutine decisions by analyizing relevant costs and benefits. Relevant costing is an incremental analysis which means that it considers only relevant costs i. Discuss when it would be appropriate for a company to adopt a relevant costing approach. The total of these costs will change in proportion to the change in activity or volume. The concept of relevant cost is used to eliminate unnecessary data. Management accounting helps the management to conduct the business in a more ef. Using this approach will simplify the decision making process as it will eliminate redundant. Standard costing can aid in addressing this point to a large extent. In week 5 we will study the more advanced approaches to costing activitybased costing abc and relevant costs that provide for the more accurate costing of products, projects, and divisions, and allow to reveal actual relationship between numbers and people. A pastry chef creates and delivers specialty desserts to local restaurants and had.
Costing is defined as the technique and process of ascertaining costs. Relevant costs for decision in an effective controlling system. Importance of costing in managerial decision making your. The principle of relevant costing is that decision making should be based on relevant costs. Relevant costing is a management accounting term that relates to focusing on only the costs relevant to a specific decision being made. Apr 02, 2012 relevant costing is an incremental analysis which means that it considers only relevant costs i. A relevant cost is a future cash flow arising as a direct consequence of a decision. Relevant cost of indirect labor is the incremental cost, i. Often, smallbusiness owners do not realize how expensive production can be, and only turn to costing techniques when trouble is on the. They can have a longterm impact on profitability, so you need to consider them.
Relevant costing principles for every day decisionmaking. Relevant costs vs financial accounting costs im sure by now youve noticed that relevant costing for decision making is quite different from costing undertaken for the purposes of financial accounting. It can be applied to a number of specific decisions in. Aug 28, 2019 relevant cost is a managerial accounting term that describes avoidable costs that are incurred when making business decisions. These costs consist of direct materials, direct labor, and manufacturing overhead.
The apportioned cost between joint products within processing accounts. These will be costs that have a direct impact on the cash flow or revenue of the business. Cost data are important since they are the basis in making decisions that are geared towards maximizing profit, or attaining other objectives. A decision is about the future and it cannot change what has been done already. A relevant cost for a particular decision is one that transforms if an alternative course of action is taken. In cost accounting, qualitative factors dont involve numbers and financial analysis. Cost accounting primarily deals with collection, analysis of relevant cost data for interpretation and presentation for various problems of management. Reapportionment of existing fixed costs are not relevant. If plant and machinery is to be replaced at the end of its useful life, then the relevant cost is the current replacement cost. Relevant costing is a management accounting term that relates to focus on only. The scope of management accounting is broader than that of cost accounting.
Cost allocation to completed units and units in process 20. A sunk cost is an expenditure that has already been made, and so will not change on a goforward basis as the result of a management decision. Relevant costing attempts to determine the objective cost of a business decision. Relevant cost, in managerial accounting, refers to the incremental and avoidable cost of implementing a business decision. Relevant cost is a managerial accounting term that describes avoidable costs that are incurred when making business decisions. Unlike direct labor, the cost of indirect labor is largely fixed and unaffected by variations in output in the short term in most cases because managerial and administrative staff is.
For example, the opportunity cost of you being here is the salary you could be making if you remained in the workforce. Managerial and cost accounting kenyatta university. Cost accounting is the process of accounting for cost which begins with recording of income and expenditure and ends with the preparation of statistical data. The relevant costing approach is therefore essential if a business is to maximise profits. An objective measure of the cost of a business decision is the extent of cash outflows that shall result from its implementation. Cost accounting accounts for the costs of a product, a service or an operation. An avoidable cost can be eliminated,p, in whole or in part, by choosing one alternative over another. In the lecture for relevant costing we are asked to re write the costs for a project in exercise 2. The impact of relevant costing for decisionmaking in readymade garments rmgs industry of bangladesh. Relevant costs in decision making relevant to paper ii pbe management accounting and finance lee siu po, simon, the chinese university of hong kong in management accounting, you often hear the term relevant cost. Relevant costs for decision in an effective controlling system 53 accountancy in terms of advanced technologies is closer to the target cost.
Six sigma is a highly disciplined process that helps us focus on developing and. A relevant cost is for a particular decision and will change if an alternative course of action is taken. In management accounting, relevant costing is a wellknown method used to assess the feasibility of production decisions in the shortrun. Pdf chapter relevant costs for decision making francisco.
Relevant qualitative factors in cost accounting decisions. Relevant costing is one of the best methods of making decisions in the short term. In cost accounting its necessary to connect the relevant cost and relevant revenue to the capacity planning. In other words, it can be said that the management accounting can be considered as an extension of cost accounting. Chapter 2 accounting for materials 53 where eoq economic order quantity c cost of placing an order n number of units required annually k carrying cost per unit of inventory ture. Relevant and irrelevant costs costs, when classified according to usefulness in decisionmaking, may be classified into relevant and irrelevant costs. A relevant cost for a particular decision is one that transforms if. Common managerial accounting decisions analyzed using relevant cost methods that can apply to all large decisions 4.
These costs do not change in total within a relevant range of volume or activity. Appreciate the impact of relevant costing for decision making in. Appreciate the impact of relevant costing for decision. Whether it is the fact that the word contains eight letters or the fact that someone sometime linked this topic with doom, relevant costing might appear more daunting than it actually is. Importance of costing in managerial decision making. Even if we were creating a standard cost card for normal products, then it if it is absorption costing we do include absorbed fixed overheads, but if it is marginal costing then we do not include fixed overheads. For example, if a company is deciding whether to expand its sales territory, the real estate tax and depreciation on the companys headquarters building is not relevant.
A current or future cost that will differ among alternatives. Management accounting, financial accounting and cost accounting. Pdf appreciate the impact of relevant costing for decision making. Cima p2 course notes chapter 1 relevant costs and decision. In management accounting, notion of relevant costing has great significance because these costs are pertinent with respect to a particular decision. It simplifies the decisionmaking process as it ignores cost. Rl ct t relevant costs for decision making identifying relevant costs a relevant cost is a cost that differs between alternatives. Pdf in management accounting, relevant costing is a wellknown method used to assess the feasibility of production decisions in the shortrun. This is a sample pdf of our managerial and cost accounting exam. Relevant costing is a term that fills many people with fear. Relevant costing practice question by muzzammil malik.
The relevant costs for a business decision are the costs. Decisions based in part on qualitative factors are relevant, even though you cant tie specific cost or revenue numbers to them. Apr 04, 20 the links to the problems are no longer working. It is concerned with actual costs incurred and the estimation of future costs. We dont create standard costs cards for oneoff projects which is what relevant costing is concerned with. Relevant costing practice question by muzzammil malik issuu. When making a decision it is imperative that an organisation look at all relevant costs. Part 1 relevant costs for decision making sunk and. She thinks that the company should adopt relevant costing. Pdf appreciate the impact of relevant costing for decision. Cima p2 course notes chapter 1 relevant costs and decision making. Write a memo explaining the circumstances in which relevant costing would be an appropriate costing method.
Using this approach will simplify the decision making process as it will eliminate redundant data. Study notes on cost accounting your article library. Thus cost accounting is a quantitative method that collects, classifies, summarises and interprets information for product costing, operation planning and control and decision making. Any short term decisions should be approached using relevant costing principles companies and government bodies have increasingly tended to concentrate on their core competences what they are really good at and turn other functions over to specialist contractors. Irrespective of what treatment is used in the companys management accounts to split up costs, if the total. Relevant, of course, refers to the cost and revenue that makes a difference when you make decisions.
Pdf relevant costing is a management accounting term that relates to focusing on only the costs relevant to a specific decision being made. Apr 27, 2018 the reverse of a relevant cost is a sunk cost. The targetcosting method is an essential step in developing management methods established by the analysis current based on creating value for the customer. It is the formal mechanism by means of which cost of products or services are ascertained and controlled.
Pdf in management accounting, relevant costing is a wellknown method used to assess the feasibility of production decisions in the. Management accounting practical science of value creation measures and reports financial information as well as other types of information that are intended primarily to assist managers in fulfilling the goals of the organisation. Sunk costs outlays of resources or effort from past periods. Management accounting practical science of value creation measures and reports financial information as well as other types of information that are intended primarily to assist managers in. Relevant cost is closely linked to incremental analysis, and refers to costs which differ across decision or situation. Relevant costing is often used in shortterm decisionmaking and a number of specific. Relevant costing class practice question 1 your company regularly uses material x and currently has in inventory 500 kgs for which it. Identify the nature of various cost items and their relevance to decisionmaking.