Make or buy decision explanation with solved example factors. Management accounting and decisions 2 workshop solutions week beginning november 16 th 2009 relevant costing 1. Aug 28, 2019 relevant cost is a managerial accounting term that describes avoidable costs that are incurred when making business decisions. For example, the opportunity cost of you being here is the salary you could be making if you remained in the workforce. Thus, costing simply means cost finding by any process or technique. An objective measure of the cost of a business decision is the extent of cash outflows that shall result from its implementation. Apr 02, 2012 relevant costing is an incremental analysis which means that it considers only relevant costs i. Make or buy decision explanation with solved example. Relevant costing attempts to determine the objective cost of a business decision. Wide acceptance of a high correlation between direct labor and. Jb limited a the relevant costs for the production of 400 components are as follows. Some of the qualitative factors relating to make or buy decision are as follows. Ferris corporation makes a single product a fire resistant commercial filing cabinet that it sells to office furniture distributors. Opportunity costs revenues or profits foregone by choosing an alternate course of action.
The concept of relevant cost is used to eliminate unnecessary data. An auto parts supplier sells hardybrand batteries to car dealers and auto mechanics. Target costing has a few problems that one should be aware of and guard against. Managerial and cost accounting kenyatta university. A variable cost can be a sunk cost, if it has already been incurred. Jones and bartletts books and products are available through most bookstores and online booksellers. A relevant cost or benefit is a cost or benefit that differs, in total, between the alternatives. Relevant costing practice question by muzzammil malik. Pdf joint and byproduct costing introduction arthur pun. The term relevant means applicable to decision at hand. Chapter relevant costs for decision making solutions to questions 1 a relevant cost is a cost that differs in total between the alternatives in a decision. What do you understand by relevant cost for decision making.
The actual production and relevant data are as follows. The annual demand is approximately 1,200 batteries. Process costing process costing is a method of costing used mainly in manufacturing where units are continuously massproduced through one or more processes. Chap14 relevant costing problem exercises free download as word doc. The company has a simple abc system that it uses for internal decision making. With the information given, we can find the cost of equity using the dividend growth model. Relevant cost refers to the incremental and avoidable cost of implementing a business decision. Variable and absorption costing exercises accounting for. The relevant costs for a business decision are the costs. Relevant costing is an incremental analysis which means that it considers only relevant costs i. Test questionsrelevant cost for decision making finance. In process costing it is the process that is costed unlike job costing where each job is costed separately. Examples of this include the manufacture of erasers, chemicals or processed food. In management accounting, notion of relevant costing has great significance because these costs are pertinent with respect to a particular decision.
The manager has discounted the net relevant posttax operating cashflows using the. Here we have information to calculate the cost of equity using the capm. Wheldon has defined costing as, the classifying, recording and appropriate allocation of expenditure for the determination of costs, the relation of these costs to sales value and the ascertainment of profitability. Any cost or benefit that does not differ between the alternatives. Relevant costing how it relates to pricing the minimum price is determined by the company taking all relevant costs into account. Marginal and absorption costing 227 2 the principles of marginal costing the principles of marginal costing are as follows. In this article we will discuss about the top five problems on cost sheet with their relevant solutions. Problems on material variances in the topic standard costing variance analysis involving two or more materials for finding out material cost, price, quantityusage, mix, and yield variances. Methods of costingjob batch and contract costing 119146 study note 6 process costing 147180. Variable and absorption costing problems we have five solved problems about variable and absorption costing topic.
Problem1 variable costing income statement and reconciliation problem2 variable and absorption costing unit product costs and income statements. In this article we have compiled various cost accounting problems along with its relevant solutions. Relevant costs problems and solutions 2016 acct 3023 jwu. In this article we will discuss about the top five problems on process costing with their relevant solutions. Costs are relevant if they guide the manager towards the decision that synchronizes with top managements objectives. Wide acceptance of a high correlation between direct labor and overhead costs. Relevant costing solutions workshopsolutions 16th 2009. The unit cost for c is 7% lower under abc when compared to traditional costing. Economic order quantity is the level of inventory that minimizes the total inventory holding costs and ordering costs. Target costing was applied to all product development efforts in the company including the neon, a new small car developed for the lower price range. May 2006 examinations managerial level paper p2 management. Relevant costs can be defined as any cost relevant to a decision. A manufacturing concern, which has adopted standard costing, furnished the following information.
Cima p2 course notes chapter 1 relevant costs and decision. Relevant costs rc practice problems solutions pg 1 relevant costs rc practice problems solutions 1. This is a sample pdf of our managerial and cost accounting exam you can view the entire exam 81 pages containing 520 questions plus answers. Relevant costs for decision making solutions to questions 1 a relevant cost is a cost that differs in total between the alternatives in a decision. Relevant cost, in managerial accounting, refers to the incremental and avoidable cost of implementing a business decision. To contact jones and bartlett publishers directly, call 8008320034, fax 9784438000, or. Material variances problems involving two or more materials. Relevant costs rc practice problems solutions pg 2 4. Solutions to relevant cost problems labour economics profit. Chapter relevant costs for decision making solutions to questions.
Test your understanding with practice problems and stepbystep solutions. A relevant cost for a particular decision is one that transforms if an alternative course of action is taken. Activitybased costing is a method of assigning indirect costs to products and services by identifying cost of each activity involved in the production process and assigning these costs to each product based on its consumption of each activity. Relevant cost is a managerial accounting term that describes avoidable costs that are incurred when making business decisions. Operating costing solutions to assignment problems problem no. Uc inventory unit cost, cc carrying cost as %age of unit cost practice economic order quantity problems and solutions. More importantly, while c looks like it is making a loss under traditional costing, abs tells a different story. Chap14 relevant costing problem exercises profit accounting. An opportunity cost is the benefit that is lost or sacrificed when rejecting. The role of management accountant in deciding among alternative counsel action is crucial. The main factors to consider in classifying costs as relevant or irrelevant to a decision can be considered under the following four headings. Relevant cost analysis relevant costs are costs to be incurred at some future time and that differ for each option available to the decision maker.
To contact jones and bartlett publishers directly, call 8008320034, fax 9784438000, or visit our website. Though quantitative considerations are important and may be decisive but make or buy decision may not be appropriate if relevant qualitative factors are ignored. Economic order quantity refers to that number quantity ordered in a single purchase so that the accumulated costs of ordering and carrying costs are at the minimum level. Activity based costing questions and answers prepared by. Describe the various steps involved in rational decision making.
Explain this statement with special reference to special order acceptance. Relevant cost explanation examples concept applications. Pdf joint and byproduct costing introduction arthur. Every decision involves choosing from among at least two alternatives.
There is no tax depreciation available on the investment. Solutions to relevant cost problems free download as word doc. Relevant costing attempts to determine the objective cost of a. Its all relevant sunk costs outlays of resources or effort from past periods. However, the owner of the garage might insist that the truck be insured and licensed if it is left. In this article we will discuss about the top five problems on operating costing along with their relevant solutions. Variable and absorption costing problems accounting. Formula eoq economic order quantity, ru annual required units, oc ordering cost for one unit. The economic order quantity can be determined by the following simple formula. It is one of the oldest classical production scheduling models. The company pays corporation tax on its net relevant operating cashflows at the rate of 20%. Not all fixed costs are sunkonly those for which the cost has already been irrevocably incurred. Whereas absorption costing recognises fixed costs usually fixed production costs as part of the cost of a unit of output and hence as product. Relevant costing practice question by muzzammil malik issuu.
Inventory management example problems with solutions. Activitybased costing calculation steps and example. What is the relevant cost of the materials required for manufacture of the new product. Inventory management example problems with solutions 1. Assumption was satisfactory when direct labor was a major portion of total manufacturing costs. Unit 6 module 10 standard costing inflibnet centre.
After reading this article you will learn about cost accounting problems on. Economic order quantity examples formula questions. Activitybased costing is a method of assigning indirect costs to products and services by identifying cost of each activity involved in the production process and assigning these costs to each product based on its consumption of each activity activitybased costing is a more refined approach to costing products and services than the traditional cost allocation methods. For example, the opportunity cost of you being here is the. Relevant cost of indirect labor is the incremental cost, i. It can be applied to a number of specific decisions in. Cima p2 course notes chapter 1 relevant costs and decision making. The development of the process can be lengthened to a considerable extent since the design team may require a number of design iterations before it can devise low cost product that meets the target cost and margin criteria. A relevant cost is for a particular decision and will change if an alternative course of action is taken. Here is a compilation of top eight problems on breakeven analysis with their relevant solutions. In management accounting, relevant costing is a wellknown method used to assess the feasibility of production decisions in the shortrun. In the lecture for relevant costing we are asked to re write the costs for a project in exercise 2.
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