How Do We Determine If A Cost Or Revenue Is Relevant?

What are make or buy decisions?

A make-or-buy decision refers to an act of using cost-benefit to make a strategic choice between manufacturing a product in-house or purchasing from an external supplier..

Is replacement cost a relevant cost?

If plant and machinery is to be replaced at the end of its useful life, then the relevant cost is the current replacement cost. If plant and machinery is not to be replaced, then the relevant cost is the higher of the sale proceeds (if sold) and the net cash inflows arising from the use of the asset (if not sold).

What’s the difference between relevant and irrelevant?

The difference between Irrelevant and Relevant When used as adjectives, irrelevant means not related, not applicable, unimportant, not connected, whereas relevant means directly related, connected, or pertinent to a topic.

What are the two types of relevant costs?

Relevant costs include the expected costs that a company plans to incur. It may consist of differential, avoidable, and opportunity costs. Differential cost is the cost gap or difference between the two choices. Avoidable costs are the cost that a company can avoid by making one choice over another.

Are sunk costs relevant in decision making?

Sunk costs are excluded from future decisions because the cost will be the same regardless of the outcome. The sunk cost fallacy arises when decision-making takes into account sunk costs. By taking into consideration sunk costs when making a decision, irrational decision making is exhibited.

What is an example of a relevant cost?

Example of Relevant Cost Almost all of the costs related to adding the extra passenger have already been incurred, including the plane fuel, airport gate fee, and the salary and benefits for the entire plane’s crew. Because these costs have already been incurred, they are sunk costs or irrelevant costs.

Are all future costs relevant in decision making?

The costs which should be used for decision making are often referred to as “relevant costs”. … a) Future: Past costs are irrelevant, as we cannot affect them by current decisions and they are common to all alternatives that we may choose.

What is the meaning of relevant?

relevant, germane, material, pertinent, apposite, applicable, apropos mean relating to or bearing upon the matter in hand. relevant implies a traceable, significant, logical connection. found material relevant to her case germane may additionally imply a fitness for or appropriateness to the situation or occasion.

Are avoidable costs relevant?

An avoidable cost is one that can be eliminated completely depending on the alternative we pick. An avoidable cost is a relevant cost, while unavoidable costs are irrelevant costs.

What is the difference between relevant and irrelevant evidence?

Relevancy refers to the probative value of evidence and its relationship to the purpose for which it is offered to prove. … Irrelevant evidence is deemed impertinent to a fact or argument and it is not material to a decision in the case. Irrelevant evidence is commonly objected to and disallowed at trial.

What makes a cost relevant?

‘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. a decrease in amounts that must be paid.

Is salary a relevant cost?

Relevant costs are those costs that will make a difference in a decision. Relevant costs are future costs that will differ among alternatives. … The salaries of the product line managers and other employees whose salaries will be eliminated are relevant to the decision.

What is a relevant example?

2. The definition of relevant is connected or related to the current situation. An example of relevant is a candidate’s social view points to his bid for presidency. adjective.

Which of the following costs are never relevant in the decision making process?

Sunk costs are those costs that happened and there is not one thing we can do about it. These costs are never relevant in our decision making process because they already happened!

Which one of the following items would be relevant to a make or buy decision?

In a make-or-buy decision, which costs can be considered relevant? Incremental variable costs, incremental fixed costs, and opportunity costs.

Which of these are not relevant costs?

Irrelevant costs are those that will not change in the future when you make one decision versus another. Examples of irrelevant costs are sunk costs, committed costs, or overheads as these cannot be avoided.

What are the relevant costs in a make or buy decision?

Examples of relevant costs in the context of a make or buy decision include direct labor, direct materials, variable overhead. Other costs that should be considered in this category are any incremental costs necessary for a part manufacturing.

What is the difference between relevant and sunk costs?

A sunk cost is a cost that has been incurred and cannot be recovered. … When a manager is considering a particular decision, relevant costs are the costs that are incurred if the decision is made and irrelevant costs are the costs that are incurred whether or not the decision is made.