Sunk costs are costs that have proven to be unproductive Sunk costs (past expenditures) and irrelevant overhead costs are excluded. All costs are avoidable in a decision except sunk costs and future costs that do not
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Differ between the alternati ves at hand
Consistency demands that a cost that is releva nt in one decision be regarded as
Relevant in other decisions as well Businesses use relevant costs in management accounting to conclude whether a new decision is economical A particular cost may be relevant for one situation but irrelevant for another The opposite of relevant costs is sunk cost or irrelevant costs, which refers to the expenses already incurred.
Relevant cost analysis usually misses three aspects of strategic success, whether the strategy is product differentiation or cost leadership That’s because customer benefit, customer cost, and the drivers of customer benefit and cost aren’t always financial. Takes all variable and fixed cost into account to analyze decision alternatives Considers only variable cost as they change with each decision alternative
Considers the change in reported net income for each alternative to arrive at the optimum decision for the company.
Which of the following statements is true with respect to target costing It excludes consideration of the company's desired profit It begins by calculating unit product costs using absorption costing It helps companies manage their product costs before a product is designed, manufactured, and sold.
Sunk costs (past costs) or committed costs are not relevant Sunk, or past, costs are monies already spent or money that is already contracted to be spent A decision on whether or not a new endeavour is started will have no effect on this cash flow, so sunk costs cannot be relevant. Relevant costs include additional materials, labor, and opportunity costs, but exclude fixed overheads
For example, a bakery receives a large custom cookie order at a discounted price
If the bakery has idle capacity and the order covers variable costs, it may accept it for the extra profit.
