Relevant costs
Identifying relevant costs
Making Decision
Future costs
Cash flows
Incremental costs
Machinery user costs:
Hire charges
Depreciation:
not a cash flow
Purchase Resale
: a sunkvalue
cost( 沉没成本)
Relevant cost of labour
There is spare capacity and the salaried staff are paid anyway
zero
The staff are working to their contracted hours additional hours
can be obtained, for example overtime or by hiring additional staff
Current rate of pay
Staff are fully utilised on existing work, and no additional hours
can be obtained
Direct labour cost plus variable overhead costs
and contribution foregone
Already in
stock/Having
decided to buy
Regularly
used and
need
more
scrapped
Not
regularly
used
Relevant
cost of
materials
Future/current
purchase
Scrap/disposal
value
Alternative use
Not in
stock
Future/current
purchase
Higher of value in
other use or
scrap/disposal value
Make or buy
decisions
A make or buy decision, is the choice
between making products in-house or
purchasing them from an external supplier.
The relevant costs are the differential costs between
two options when there are no limiting factors
restricting the in-house production capacity.
Production
Direct materials
Direct labor
Variable production overhead
W
1000
$4
$8
$2
X
2000
$5
$9
$3
$14
Incurred as a direct consequence of
Incurred as a direct consequence of
Incurred as a direct consequence of
Incurred as a direct consequence of
Other fixed costs (committed)
making W
making X
making Y
making Z
$17
Y
4000
$2
$4
$1
$7
$ 1000
$ 5000
$ 6000
$ 8000
$ 30000
$ 50000
Z
3000
$4
$6
$2
$12
Further considerations
a. Maximum use of spare capacity
b. Hidden benefits from sub-contracting
c. Possible dispute of losing work
d. Reliability of sub-contractor
e. Be flexible or control over
f. Reliability of estimated fixed cost savings
Outsourcing
Outsourcing is the use of external suppliers for
finished products, components or services.
This is also known as contract manufacturing
(合同制造/委约生产) or sub-contracting.
Why outsourcing?
a. Specialist contractors can offer
superior quality and efficiency.
b. Outsourcing can free capital to
invest it in core activities.
c. Contractors have the capacity and flexibility to start
production quickly to meet sudden variations in
demand.(合同商能快速应对需求的变化)
d. There is not enough work to keep
internal staff fully occupied.
Further processing
decisions
Joint products are two or more products which are output from the same
processing operation ,but which are indistinguishable from each other up to their
point of separation.
Joint costs are incurred before split-off point and they are therefore
irrelevant to the further processing decision.
不管企业决定立即销售还是进一步加工,联合成本已经发生并且不
可改变,在决策分析中属于无关成本,不必考虑.
关键在于分析联产品在加工后所增加的收入incremental revenues
是否超过所追加的成本incremental costs
To sell or to process further
IR > IC
PROCESS further
IR < IC
sell
Example （P172. 4.2）：
Incremental revenue=
Total sales of Alashplus($3.25*60,000) – total sales of Alash
($1.25*100,000) =195,000 – 125,000=70,000
Incremental cost=
Extra fixed costs($20,000)+variable cost（30c
*100,000)=20,000+30.000=50,000
IR>IC ：70,000-50,000=20,000
So it is $20,000 more profitable to process further into
Alashplus.
Shut down
decisions
Longer-term considerations:
a. Saving in annual operating costs
运营成本的节约
b. Release unwanted non-current assets for sale
退出的固定资产的处置及可收回价值
c. Employees made redundant or relocated
员工的安置
short-run decisions
based on short-run relevant costs
相对剩余生产能力不能转移
如果该亏损产品的单位贡献边际>0，就可以继续生产，反之需要停产。因为继续生
产该产品，可以提供正的贡献边际，以补偿部分固定成本，继续生产可以使企业少
损失，若停产则根本无法弥补固定成本。
相对剩余生产能力可以转移
此时需要考虑机会成本。转移生产能力可以生产其他产品，生产的其他产品获得的
收益作为机会成本由亏损产品承担。如果亏损产品的贡献边际>转移剩余生产能力的
机会成本，就应该继续生产，否则应停产。
Example P175 5.2
人
何宇晖
示
朱钰寒
展
赖琦