Relevant Information
for Decisions
Background
Relevant Information
Two primary characteristics distinguish
relevant from useless information:
1. Relevant information differs among the
alternatives under consideration.
2. Relevant information is future oriented.
Relevant (Differential) Revenues
Relevant revenues must (1) be future oriented
and (2) differ for the alternatives under
consideration. Since relevant revenues differ
between the alternative, they are sometimes
called differential revenues.
Sunk Cost
A sunk cost has been incurred in the a past transaction and cannot be changed,
they are not relevant for making current decisions.
Relevant (Avoidable) Costs
Unit-level
Activities
Avoided by eliminating one
unit of product.
Batch-level
Activities
Avoided when a batch of
work is eliminated.
Product-level
Activities
Avoided if a product line
is eliminated.
Facility-level
Activities
Some costs may be avoided
if a product line is eliminated.
Budgeted Cost for Expected Production of 2,000 Printers
Unit-level costs
Materials costs (2,000 × $90)
$
180,000
Labor costs (2,000 × $82.50)
165,000
Overhead (2,000 × $7.50)
15,000
Total unit-level costs
$ 360,000
Batch-level costs
Assembly setup (10 × $1,700)
17,000
Materials handling (10 × $500)
5,000
Total batch-level costs
22,000
Product-level costs
Engineering design
14,000
Production manager's salary
63,300
Total product-level costs
77,300
Facility-level costs
Segement-level costs
85,000
Division manager's salary
12,700
Company president's salary
43,200
Depreciation
27,300
General expenses
31,000
Total facility-level costs
199,200
Total expected costs
$ 658,500
Cost per unit - $658,500 ÷ 2000 = $329.25
Here is budgeted cost
information for
Premier, a company
that produces
printers. The
company has enough
capacity to produce
additional printers,
but is planning to
produce to meet
current demand.
Differential Analysis – What if Production is Increased to 2,500 units
Budgeted Cost for Expected Production of 2,500 Printers
Unit-level costs
Materials costs (2,500 × $90)
$ 225,000
Labor costs (2,500 × $82.50)
206,250
Overhead (2,500 × $7.50)
18,750
Total unit-level costs
$ 450,000
Batch-level costs
Assembly setup (12 × $1,700)
Materials handling (12 × $500)
20,400
6,000
Total batch-level costs
26,400
Product-level costs
Engineering design
14,000
Production manager's salary
63,300
Total product-level costs
77,300
Facility-level costs
Segement-level costs
85,000
Division manager's salary
12,700
Company president's salary
43,200
Depreciation
27,300
General expenses
31,000
Total facility-level costs
199,200
Total expected costs
$ 752,900
Cost Per Unit
$ 301.16
Difference in per unit costs results from reduction of fixed cost per unit.