Question

1. “Relevant Cost and Irrelevant Cost concepts are very significant for decision making in organizations.” Discuss the statement
2. What is Sunk Cost and is it necessary for decision making?
3. What is meant by “make or buy” decision? Use an example to explain how “make or buy” decisions are made?
4. Kindly type your response in order for me to copy and paste

Answer 1

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“Relevant Cost and Irrelevant Cost concepts are very significant for decision making in organizations.” Discuss the statement

Relevant Cost are those costs which will incur only if the decision is taken. These are generally variable costs or incremental fixed. These are crucial in decision making process and these affect the end result of decision making.

Irrelevant Cost are those costs which will incur irrespective of the decision is taken or not. These are sunk costs and does not affect the end result of decision making.

What is Sunk Cost and is it necessary for decision making?

Sunk cost are those costs which will incur irrespective of the decision is taken or not. These does not affect the end result of decision making. Example may be depreciation, fixed overhead, salaries of corporate etc.

What is meant by “make or buy” decision? Use an example to explain how “make or buy” decisions are made?

“Make or buy” decision means to evaluate among whether to buy a product or manufacture depending on which activity gives most savings.

Example: Suppose X company can make a product with following cost:
Direct Materials	8.00
Direct Labor	6.80
Overhead per unit	6.40
Fixed overhead	43,700.00
Or it can buy from outside at $ 20.56. per unit.
Now it will choose that option which will give most savings. Fixed cost will not be considered as that they will continue to incur even if there is no production. It is a sunk cost.
Calculation is below:
X company
Calculation of variable and fixed overhead:	Amount $	Note
Overhead per unit	6.40	A
Units produced	19,000.00	B
Total overhead	121,600.00	C=A*B
Les: Fixed overhead	43,700.00	D
Variable overhead	77,900.00	E=C-D
Variable overhead per unit	4.10	F=E/B
Relevant cost per unit	Amount $
Direct Materials	8.00
Direct Labor	6.80
Variable Overhead	4.10	See F
Relevant cost per unit	18.90	G
Calculation of savings	Amount $
Purchase price for 1 unit	20.56	H
Less: Relevant cost per unit	18.90	See G
Savings per unit	1.66	I=H-G
Production	19,000.00	J
Total savings	31,540.00	K=I*J