Is fixed cost a relevant cost?
2. Re-apportionment of existing fixed costs are not relevant. Irrespective of what treatment is used in the company’s management accounts to split up costs, if the total costs remain the same, there is no cash flow effect caused by the decision. Note that additional fixed costs caused by a decision are relevant.
Are fixed costs relevant or irrelevant?
It can be noted that fixed costs are often irrelevant because they cannot be altered in any given situation.
Why are fixed costs relevant?
Furthermore, keep in mind that fixed costs can provide a useful gauge of a business’s capacity — how much building space it has, how many machine-hours are available for use, how many hours of labor can be worked, and so on. Managers have to figure out the best way to utilize these capacities.
Do relevant costs include fixed costs?
Costs that are same for various alternatives are not considered e.g. fixed costs. Only those costs that are different for each alternative are the relevant costs and are considered in decision making e.g. variable costs. Fixed costs can also be relevant if they change due to a decision.
Are variable costs relevant cost?
Variable costs are always a relevant cost: Variable costs are relevant costs only if they differ in total between the alternatives under consideration.
How do you determine relevant costs?
‘Relevant costs’ can be defined as any cost relevant to a decision. A matter is relevant if there is a change in cash flow that is caused by the decision. The change in cash flow can be: additional amounts that must be paid.
Which fixed costs are relevant for decision making?
Fixed costs can be relevant but they have to be related to a specific decision. On the other hand, fixed costs that are general in nature (i.e. fixed costs that we incur regardless of whichever decision is made), would not be considered relevant.
Why fixed costs are not relevant for most short term decisions?
Fixed costs are sunk costs—because they are in the past and cannot be altered, they should play no role in economic decisions about future production or pricing.
What are relevant costs in accounting?
Relevant cost is a managerial accounting term that describes avoidable costs that are incurred only when making specific business decisions. The concept of relevant cost is used to eliminate unnecessary data that could complicate the decision-making process.
What are relevant costs examples?
What is a relevant cost example? A company decides to buy loading machinery for a factory unit. The purchase of this machine can save the wage expenses of 20 manual laborers. Since these expenses change in the future due to the buying decision, these costs are relevant.
Which of the following is a relevant cost?
The correct answer is c: replacement cost.
Is opportunity cost a relevant cost?
An opportunity cost is a hypothetical cost incurred by selecting one alternative over the next best available alternative. Opportunity costs are relevant in business decision making. In addition, companies commonly use them when evaluating corporate projects.