Relevant Costing

Type of costs used in Decision Making

Relevant costs expected future costs and are different between decision alternatives
Out-of-pocket costs require current or near future cash outlays or incurring of a liability for a
decision at hand
Postponable costs may be deferred or shifted to a future date or period of time without adversely
affecting current operations. Not avoidable costs
Opportunity costs income or benefit sacrificed
Imputed costs assumed or hypothetical costs representing the cost or value of a resource that is
utilized for a specific purpose
Sunk costs non-recoverable costs incurred in the past (historical) usually irrelevant should not be
totally ignored
Joint costs in process further or sell-as-is, usually irrelevant, total will not change no matter how
the same is allocated to individual products

MAKE OR BUY
X Company, a manufacturer of furniture sets, is considering to purchase the seat cushions needed for
its chair. The expected purchase price of these seat cushions is P50 per unit.
If it would continue to produce these cushions, the company expects to incur the following costs:
 *Assume that 40% of the fixed factory
overhead could be eliminated if the
company would discontinue the
manufacture of seat cushions.

*Assume that materials and labor costs

are expected to increase by 20% next
period. Factory overhead will be eliminated in case the company decides to buy the seat cushions
from other suppliers. Moreover, the facilities presently being used in the manufacture of seat cushions
can be utilized to manufacture another part of the main product in case such facilities become vacant
when the company decides to stop producing the seat cushions. This alternative use of resources
would result into cost savings of P100,000 for X Company. Assume further that the companys
requirement for seat cushions is expected to increase by 4,000 units next period.

ACCEPT OR REJECT
A SPECIAL ORDER
X Company presently produces and sells 20000 units of product G which represents only 80% of its
normal capacity of 25000 units. Its regular selling price is P50 per unit and its manufacturing, selling
and administrative costs are as follows:
*X Companys normal capacity is 60000 units. Since the past few months, it has utilized only one half
of this capacity. For Last month, the result of its operations is summarized: