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Aggregate Planning

Relevant Cost

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DEFINITIONS

1. RELEVANT COSTS: THOSE THAT DIFFER BETWEEN ALTERNATIVES

(COSTS AND REVENUES)

2. OPPORTUNITY (WHAT IF COSTS) ARE SOMETIMES RELEVANT

3. IRRELEVANT COSTS: THOSE THAT DO NOT DIFFER BETWEEN ALTERNATIVES

(COSTS AND REVENUES)

4. SUNK COSTS ARE COSTS THAT HAVE ALREADY OCCURRED AND ARE ALWAYS IRRELEVANT.

5. THE COMPARISON OF ONLY THE RELEVANT COSTS BETWEEN ALTERNATIVES IS CALLED:

DIFFERENTIAL ANALYSIS

INCREMENTAL ANALYSIS

6. DECISION RULE:

BASIC COST BENEFIT ANALYSIS



USES OF RELEVANT COSTING TO MANAGEMENT DECISION MAKING:

1. ASSETS REPLACEMENT FOR COST REDUCTION

(SHORT-RUN CAPITAL BUDGETING)

(WATCH FOR SUNK COSTS SUCH AS DEPRECIATION)

(REVENUES AS WELL AS COSTS MAY BE RELEVANT)

2. PRODUCT LINE OR SEGMENT ANALYSIS

(WATCH FOR NON-ALLOCATED COMMON COSTS)

(WATCH AVOIDABLE VS NON-AVOIDABLE FIXED COSTS)

(WILL COSTS FROM DEFUNCT SEGMENT ATTACH TO A NEW ONE)

3. MAKE OR BUY DECISIONS

(WATCH AVOIDABLE VS NON-AVOIDABLE FIXED COSTS)

(BEWARE OF PRICE CHANGES)

(BEWARE OF OPPORTUNITY COSTS ON CAPACITY)

4. SPECIAL ORDERS


(WATCH FACTORY CAPACITY AND CUSTOMERS)

(ONE TIME ORDERS, NOT FREQUENT MULTI-YEAR)

(WATCH FOR OPPORTUNITY COST ON LOST SALES)

5. LIMITED RESOURCES


(CONTRIBUTION MARGIN/UNIT RULES)

(BE AWARE OF MINIMUM NEEDS ON ALL PRODUCT LINES)

(MAXIMIZE PRODUCT MIX WITH LP)

6. SELL OR PROCESS FURTHER

(JOINT PRODUCT IRRELEVANCY CONCEPT)

(OPPORTUNITY COSTS ARE IMPORTANT

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