PAPER 70

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School

Keiser University, Miami *

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5075

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Business

Date

Nov 24, 2024

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docx

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Uploaded by ConstablePencilMongoose36

Hello Professor and Classmates, According to Noreen et al. (2023), relevant costs are considered part of the decision-making process. Relevant costs play an essential role in decisions, including retaining or replacing, for example, equipment. The key is to determine between relevant and irrelevant costs. Managers will conduct a relevant cost analysis to assess the relevant costs further and not consider irrelevant costs, such as sunk costs. For example, a company which bought raw materials five years ago for the total cost of $1,500. The raw material has become obsolete and no longer has any use for the company, this becomes a sunk cost as original invested money cannot be recuperated. The cost analysis may include evaluating a particular piece of equipment's existing and future operating costs. According to Wang et al. (2023), sunk costs are unrecovered costs, irretrievable costs once invested. Part of the decision process and selecting relevant costs includes the selection of a minimum of two choices to identify which alternative is the best choice. In addition, Noreen et al. (2023) reviews the six key concepts of decision making including: 1. A selective process that requires deciding between at least two alternatives and which one will be more profitable. 2. Identify the specific criteria for determining the selected alternative, including the relevant costs and the benefits of the selection. Part of the concept includes eliminating irrelevant costs and their pertaining benefits. 3. The differential analysis considers future costs and benefits among the selected alternatives, further identified as differential cost; future revenue as differential revenue; incremental cost, which further identifies the increase in cost; and avoidable cost by eliminating an unnecessary cost by selecting only one alternative. 4. They acknowledged that sunk costs are irrelevant and should not be selected. 5. Future costs and benefits that differ from alternatives are irrelevant to the decision-making process. 6. Recognition of opportunity costs is essential for decision-making, the benefit of selecting one alternative over another. It is essential to consider only the relevant costs when conducting a differential analysis for a significant purchase, as excluding irrelevant costs during the differential analysis allows a better, more precise focus on a cost decision that will significantly impact the cash flow. Identifying the relevant costs and their potential benefits can lead to a better outcome. According to Li et al. (2023), when looking into an equipment's life cycle cost as irrelevant, the cost incurred from the beginning purchase to the end of the service life should be considered. The decision to consider all costs can have a negative outcome at the end of the decision as not all costs are the same. When considering relevant costs, options are available in contrast to irrelevant costs that may have incurred depreciation, like old paid equipment. Noreen et al. (2023) further clarify that two powerful reasons drive the isolation of relevant costs during the differential analysis, identifying that not

all information will be accessible when preparing the income statement and combining both costs relevant and irrelevant, derails vital information by creating confusion; in addition, irrelevant information creates an opportunity for incorrectly use ending up in wrongful decisions. The selection of relevant costs allows a targeted decision that focuses on the future cash outflow using a selective approach method in contrast to irrelevant costs, which do not participate in the discriminatory method and do not directly impact the decision. A custom t-shirt maker company plans to expand its business and replace its old printing machine with a new one. One company offers a digital printing machine with top-of-the-line specifications and a two- year warranty, including replacement pieces; the competition offers a cheaper machine without the warranty added. When comparing both options, the business owner must decide the pros and cons of the options by identifying the individual relevant costs and benefits. Option one offers a warranty, which in the long run may have a more significant impact on the cost of the machine in contrast to the second option, which may cost more if it breaks down. In this case, the relevant cost includes how much money the company is planning on spending on the new machine. The future company profit or loss impact will depend on the new machine able to deliver the number of T-shirts the company expects to make and sell. An Amazon truck traveling interstate will have a set route from one state to another. However, suppose another truck gets into an accident. In that case, the company may need to send another truck to the rescue to pick up the merchandise to stay on the delivery promised schedule. Rerouting one truck to assist with delivering goods will be considered part of the relevant costs, including the goods uploading and uploading. The indirect costs are those already incurred, such as the truck driver's salary and the truck insurance. The direct effect of the relevant cost will depend on how many trucks get into accidents and the need to find replacements for those trucks, resulting in a loss for the company as relevant costs can be more significant than expected, and the customers cancel the orders. In summary, relevant cost analysis plays an essential role in making the right decision, and ignoring the irrelevant costs is part of the elimination process as, ultimately, it does not affect the decision in progress. Relevant costs allow business owners to focus on the essential details influencing future cash inflows. References: Li, B., Wang, P., Sun, P., Meng, R., Zeng, J., & Liu, G. (2023). A Model for Determining the Optimal Decommissioning Interval of Energy Equipment Based on the Whole Life Cycle Cost. Sustainability, 15 (6), 5569. https://0634a76sq-mp01-y-https-doi-org.prx-keiser.lirn.net/10.3390/su15065569 Noreen, E., Brewer P., & Garrison R.H. (2023). Managerial Accounting for Managers. 6th Edition. McGraw Hill. Wang, K., Chen, Z., Zhang, L., Liu, J., & Li, B. (2023). Incentive Mechanism for Improving Task Completion Quality in Mobile Crowdsensing. Electronics, 12 (4), 1037. https://0634a7wyd-mp03-y-https-doi-org.prx- keiser.lirn.net/10.3390/electronics12041037

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