Question

Ahmed owns Ahmed Manufacturing LLC based in Muscat. In deciding on several important business-related decisions, he has to deal with the following independent scenarios/statements: (i) All future costs are relevant in decision making (ii) A sunk cost is a cost that is yet to be incurred but that can be avoided at least in part depending on the action a manager takes. (iii) A cost that will be incurred regardless of Ahmed’s action is relevant to his decision. (iv) In a decision to drop a segment, the opportunity cost of the space occupied by the segment would be zero. (v) Common fixed overhead that will continue if the special offer is not accepted is relevant to Ahmed’s decision. For each of the scenario/statement (i) to (v) above, STATE your agreement OR disagreement and provide appropriate EXPLANATION(S) / JUSTIFICATION(S).

Answer 1

1-All future cost are relevant in descison making revelant cost are  cost that will make a difference in a decision. Future costs are relevant in decision making if’ the decision will affect their amounts. Relevant costing attempts to determine the objective cost of a business decision.

Relevant costing focuses on just that and ignores other costs which do not affect the future cash flows. Relevant information is the predicted future costs and revenues that will differ among the alternatives. It focuses on just that and ignores other costs which do not affect the future cash flows. Relevant costs are future costs that will differ among alternatives.

The underlying principles of relevant costing are fairly

simple and you can probably relate them to your personal experiences involving financial decisions. Relevant costing is just a refined application of such basic principles to business decisions. The key to relevant costing is the ability to filter what is and isn’t relevant to a business decision.

2.A Sunk​​​ cost is a cost that is yet to be incurred but that can be avoided atleast in part depending on action a manager takes.

Sunk cost is a cost that has already occurred and cannot be recovered by any means. Sunk costs are independent of any event and should not be considered when making investment or project decisions. Only relevant costs (costs that relate to a specific decision and will change depending on that decision) should be considered when making such decisions.

A sunk cost is a cost that cannot be recovered or changed and is independent of any future costs a business might incur. Because a decision made today can only impact the future course of business, sunk costs stemming from earlier decisions should be irrelevant to the decision-making process.

3--A cost that will be incurred regardless of Ahmed's action is relevant of his decision.

Sunk costs are the costs which were incurred in the past. Sunk costs are irrelevant for decisions, because they cannot be changed.

Opportunity Cost is the income foregone by selecting one alternative over another. These are considered as relevant costs for decision making.

Allocation of overheads means charging a cost center with such overheads which can be identified and measured. Such allocated overheads are irrelevant as already charged to cost center.

A sunk cost is the cost which has already been incurred and non recoverable. Once its incurred, this can not be recovered back. Hence it does not effect in business decision.

4.In a decision to drop a segment the opportunity cost to the space occupied by the segment would no zero.

this section, we will talk about how to decide whether to add or drop a product or service. We will also discuss a “make it” or “buy it” decision. There may also be a sell it, or process it further decision to make, ending with special order decisions. All of these situations are real, and happen everyday in businesses.

5- Comman fixed overhead that will continue if the special offer is not accepted is relevant to Ahmed's decisions.

It would not be the fixed costs related to the operations that cannot be altered and will not change with the level of production. Therefore, in most straightforward instances, fixed costs are not relevant for production decision, and incremental costs, or variable costs, are relevant for these decisions.

Irrelevant costs are costs, either positive or negative, that would not be affected by a management decision. Irrelevant costs, such as fixed overhead and sunk costs, are therefore ignored when that decision is made. However, it’s critical for a manager to be able to distinguish an irrelevant cost in order to potentially save the business.