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

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

Relevant costs in make-or-buy decisions include all incremental cash flows. Any cost that does not change as a result of the decision should be ignored such as depreciation and indirect fixed costs. Calculating the relevant cost is the first step in finding the most cost-effective option.

What do relevant costs include?

The relevant costs are future cash flows, incremental costs, opportunity costs, and avoidable costs.

Which factors are considered for make-or-buy decision?

Factors Influencing Make or Buy Decision:

  • Volume of Production: …
  • Cost Analysis: …
  • Utilization of Production Capacity: …
  • Integration of Production System: …
  • Availability of Manpower: …
  • Secrecy or Protection of Patent Right: …
  • Fixed Cost: …
  • Availability of competent suppliers or vendors.

What costs are considered for decision-making?

Costs Influencing Decision-Making and Planning (9 Types)

  • Opportunity Cost: Opportunity cost is the cost of opportunity lost. …
  • Relevant Cost: …
  • Differential Cost: …
  • Sunk Cost: …
  • Imputed Cost: …
  • Out-of-Pocket Cost: …
  • Fixed, Variable and Mixed Costs: …
  • Direct Cost and Indirect Cost:

What costs are considered 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.

How do you know if a cost is relevant in business decision-making?

In order to meet the criteria for relevancy, a cost must have two criteria that include they affect the future and they differ among alternatives. Other group of theorists asserted that the relevant costs are applicable to decision. Costs are relevant, if they direct the executive towards the decision

Which costs should be included in a make-or-buy analysis?

In a make-or-buy decision, the most important factors to consider are part of quantitative analysis, such as the associated costs of production and whether the business can produce at required levels.

How do you calculate relevant cost?

The current purchase price of $22 will be used to determine the relevant cost of Material C as this will be the value of each unit purchased. The original purchase price of $20 is a sunk cost and so is not relevant. Therefore the relevant cost of Material C for the new product is (120 units x $22) x3d $2,640.

Do relevant costs include fixed costs?

Fixed costs can be relevant but they have to be related to a specific decision. On the other hand, fixed costs that are general in nature (i.e. fixed costs that we incur regardless of whichever decision is made), would not be considered relevant.

What are the two properties of a relevant cost are?

Two important characteristic features of relevant costs are ‘Occurrence in Future’ and ‘Different for Different Alternatives.‘ This does not mean that all costs which occur in the future are not relevant costs. For a cost, item to be relevant, both the conditions should be present.

Do relevant costs include opportunity costs?

Relevant costs include differential, avoidable, and opportunity costs.

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