Concept explainers
Determination of relevant cost describes the concept of relevant concept in decision making. The relevant cost is the cost which has the impact of change with the implementation of decision.
To Discuss: The term ‘relevant cost’.
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Answer to Problem 1Q
Solution: The relevant cost is the cost incurred while making decisions. It refers to incremental
Explanation of Solution
The Relevant cost in the decision making is a cost which has the relevance while taking up managerial decisions. These are referred to as all those cost which has the impact of change (whether increase or decrease) with the implementation of decisions taken. These are referred to as following cost:
- Cash outflows need to be undertaken for implementing any project/decision and it is the relevant cost for the project/ decision.
- If the decision is to choose between the alternatives, then the relevant is the incremental cost to be incurred in a particular alternative than the cost incurred in other alternative.
- The Relevant cost also includes the opportunity cost of the next best alternative. The opportunity cost is the amount of revenue/income generated from present project, which has to be sacrificed for undertaking the new opportunity.
- The relevant cost is the cost which can be avoided if the decision is taken.
To conclude, it can be said that the relevant cost is the cost which changes with the decision making, and measuring these cost will have an impact on decision making.
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Chapter 13 Solutions
MANAGERIAL ACCOUNTING-W/ACCESS >C<
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