Relevant Costs – Managerial Accounting Decisions & Scenarios

Managerial accounting concepts

How to use relevant costs to make decisions

How to apply relevant costs to make a “make or buy” decision

How to apply relevant costs to make a “sales mix” decision

How to apply relevant costs to make a decision to eliminate a division or not

How to apply relevant costs to make a to purchase new equipment or not

How to apply relevant costs to make a to accept a special offer or not

How to set a unit sales price using cost data

Apply relevant cost methods to common managerial decisions.

Managers often need to make decisions that are not routine, not part of the normal day to day process, and that can have a long-term effect on the organization. Individuals often need to make similar decisions and can apply similar tools when making decisions of a large dollar amount that can affect multiple years.

Although the specifics of each decision differ, the concept of relevant costs helps us put together a process for gathering and analyzing data, picking up the information that matters, and removing all the excess data that does not matter to our decision. Understanding relevant costs will reduce the likelihood of making incorrect decisions based on a sunk cost effect or not taking into account opportunity costs.

We will analyze the decision-making process of buying a new piece of equipment or keeping an older piece of equipment, a question often relevant to individuals as well as businesses. The decision of whether to buy new equipment is subject to the sunk fallacy effect, and we will discuss why this is.

This course will investigate the managerial accounting question of a “special offer.” The “special offer” question often takes the form of a one time offer to purchase from us at a reduced price. It is often the case that a business will benefit from accepting a special offer and the concept of relevant costs will help us to see why. For example, a hotel may have an incentive to take a “special offer” to sleep in a room for a night at a price far below the standard rate and even below cost as it is generally calculated. We will discuss why, and how this concept applies to business in general.

We will apply the concepts of relevant costs to a “make or buy” type decision. Should we make a component internally or purchases it from an outside vendor?

The course will discuss the managerial accounting question of whether we should process a product further. In other words, should we sell a product at one point of production or should we process the product further and sell it for a higher price? We will also discuss a similar question related to defective inventory and whether we should scrap the inventory now or rework it.

We will discuss the question of what sales mix to use. In other words, if we have multiple products which ones should we produce and how much should we produce?

The course will discuss the question of eliminating a segment or department of a company. For example, if a departmental income statement shows a loss, should the department be eliminated and how can we apply relevant costs to make the best decision?

We will discuss how to use cost data to set a sales price using a cost method and variable cost method.