Performance Management

B1: Decision Making Techniques | Relevant Cost Analysis (ACCA F5)

B1- Relevant Cost Analysis

Relevant Cost Analysis explains relevant costing, identifies and calculates relevant costs for specific situations and explains opportunity costs.

Relevant Cost Analysis

Relevant costs are future cash flows arising as a direct consequence of a decision. They are used when “a decision has to be taken and the concern is whether the decision will increase profits or not, or which decision will increase profits the most.”

a) Explain the concept of relevant costing.

A relevant cost

  • Is a cost that will occur in the future
  • Must be a cost or benefit that results in cash flow
  • Must arise a direct consequence of the decision

Relevant costs do NOT include:

  • A cost that has been incurred in the past
  • Depreciation charges
  • Absorption costs
  • Sunk costs
  • Committed costs

b) Identify and calculate relevant costs for a specific decision situations from given data.

In terms of machinery user costs, relevant costs include incremental costs such as machine hire charges, the fall in resale value of machinery and assets where the fall is as a result of using the asset based on the decision.

The relevant cost of materials are their current replacement cost “unless the materials have already been purchased and would not be replaced once used.” If the materials have been purchased but will not be replaced the relevant cost is either the current resale value or the value if they were put to an alternative use.

Please refer to BPP’s ACCA F5 Performance Management Study Text for examples on identifying and calculating relevant costs.

c) Explain and apply the concept of opportunity costs.

An opportunity cost is the value of the benefit that has been sacrificed by choosing one option over another.

Please refer to BPP’s ACCA F5 Performance Management Study Text for examples on calculating the opportunity cost.

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