Relevant Costing and Linear Programming

Question 1

Characteristics of a Relevant Cost

3

Answer 1

• Future
• Different under alternatives
• Avoidable

Question 2

Usually

Variable Cost - relevant or irrelevant?
Fixed Cost - relevant or irrelevant?

Answer 2

Variable cost - usually relevant

Fixed cost - usually irrelevant (sunk cost) unless they become avoidable

Question 3

What are the relevant costs if to make?

What are the relevant costs if to buy?

Decision Rule

Answer 3

To Make
- relevant VC
- relevant FC
- opportunity costs

To Buy
- purchase costs

choose lower cost

Question 4

Accept or Reject a Special Order
- what is the minimum selling price?

This is same to transfer pricing.

Answer 4

Full Capacity = Selling Price
Excess Capacity = Variable Cost

Question 5

Accept or Reject a Special Order
- how to solve?

Decision Rule

Answer 5

Incremental Revenue
less : Incremental Costs

NOTE : Only incurred costs are relevant (✗ Avoidable)
- Avoidable Costs → can be used only in outsourcing + shutdown decisions

choose if incremental profit

Question 6

Continue or Shutdown

FC can be classified into
- traceable (direct) = relevant
- common (indirect) = allocated to other branch

How to solve Segment Margin?

How to solve shutdown point?

Answer 6

Segment Margin
- CM less Traceable FC
- Continue if Positive, Shutdown if Negative

Shutdown Point
- FC less SDC / UCM
- SDC is unavoidable
- Continue if above, Shutdown if below

Question 7

Sell or Process Further
- ignore joint costs (always irrelevant)
- how to solve?

Decision Rule

Answer 7

• SELL = sales value at splitoff
• PROCESS = Final sales value less processing cost

choose higher revenue

Question 8

If best product combination, what products are to be prioritized?

Best Product Combination

Answer 8

prioritize products w/ highest CM per limited resource

Question 9

Linear Programming
- Multiple constraints
- Upgraded version of best possible combination

What are the steps (OCSC)?

Answer 9

1. Objective Function
   max or min (ex. Z = 3A + 4B)
2. Constraint Functions
   Function 1 (ex. 2A + 5B < 120)
   Function 2 (ex. 4A + 2B < 80)
   Equate A or B as 0 in both functions
   Last is add the 2 functions and eliminate either A or B to get their value
3. Solutions feasible
4. Choice
   max or min