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Strategic Accounting essay
 
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Strategic Accounting. Custom Strategic Accounting Essay Writing Service || Strategic Accounting Essay samples, help

Relevant Cost

Any cost which is relevant in making a decision is relevant cost. In other words, a cost is relevant if non-recognition of it is likely to result in a wrong decision, i.e., any cost which is likely to affect the decision is relevant cost. It can be expressed in yet a different way; any item of cost which is likely to be different in amount in the proposal than that in the absence of proposal, is a relevant cost.  It is not possible to identify any cost item as relevant cost without much thought. The relevance of cost to the decision alternative is determined by the situation.

The facts and the policies explain situation. However, readers might have come across certain generalized statements about what is relevant and what is not. Relevant costing is of value in solving many different types of problems (Noreen, Garrison and Brewer, 2006). Traditionally, these applications include decisions to make or buy a component, to keep or drop component. All other costs are relevant. The costs of direct materials and direct labor are relevant because they will not be needed if the part is bought externally. Similarly, variable overhead is relevant, because its cost would not be incurred if the component were bought externally. Jessup Company needed to determine if it would be cheaper to make 10,000 units of billboards or to purchase them from an outside supplier for $ 4.75 each. Cost information on internal production includes the following:

 

Total Cost

Unit Cost

Direct Materials

$ 10,000

$ 1.00

Direct Labor

   20,000

2.00

Variable Overhead

     8,000

0.80

Fixed Overhead

   44,000

4.40

Total

$ 82,000

$ 8.20

Fixed overhead will continue whether the component is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.

Relevant Revenue

The company measures these transactions based on the respective fair values of the goods or services purchased and the goods or services sold. If the company is unable to determine the fair value of one or more of the elements being purchased, then revenue recognition is limited to the total consideration received for the products or services sold less the amounts paid that can be supported (McLaney, and Atrill, 1994). For example, if the company sells advertising to a customer for $ 10 million in cash and contemporaneously enters into an arrangement to acquire software for $ 2 million from the same customer, but fair value for the software cannot be reliably determined, the company would limit the amount of revenue recognized related to the advertising sold to $ 8 million.

As another example, if the company sells advertising to a customer for $ 10 million in cash and contemporaneously invests $ 2 million in the equity of that same customer, but fair value for the equity investment is determined to be only $ 1 million, the company would limit the amount of revenue recognized related to the advertising sold to $ 9 million. Accordingly, the judgments made regarding fair value in accounting for these arrangements impact the period revenues, expenses and net income over the term of the contracts.

Irrelevant Cost

Cost which is influenced by a decision is relevant cost and, hence, is important for decision-makers. Cost which is not affected by a decision is irrelevant cost, that is, it will be the same regardless of the choice that is made. As a result, such a cost is of no relevance to decision-makers. Therefore, it should be ignored while taking decisions. Committed fixed costs are irrelevant costs. However, it should not be taken to mean that relevant costs are equivalent to variable costs. In situations where additional fixed costs are to be incurred as a result of a decision, fixed costs are as much the relevant costs as the variable costs are (Guan, Mowen, and Hansen, 2007). As an illustration, if the company wants to make a component hitherto purchased from the outside suppliers, the relevant costs will be: cost of material and direct labor, fixed costs.

 

Total Cost

Unit Cost

Direct Materials

$ 10,000

$ 1.00

Direct Labor

   20,000

2.00

Variable Overhead

     8,000

0.80

Fixed Overhead

   44,000

4.40

Total

$ 82,000

$ 8.20

For example, fixed overhead consists of common factory costs that are allocated to each product line. No matter what happens to the component line, overall fixed overhead will not be affected. As a result, the fixed overhead is irrelevant; it can be safely ignored in structuring the problem (Caplan, 2010).  All other costs are relevant.

Irrelevant Revenue

Irrelevant revenue is an accounting term that represents a cost, either positive or negative, that does not relate to a situation requiring a management's decision. They are costs that may be irrelevant for some situations, but relevant for others (Bowhill, 2008). For instance, if one business says that the value of something is M, it might be relevant at that moment, but in another situation the same thing might be valued at T instead, making it irrelevant.

In conclusion, depending on the type of company that you have, a business will incur different types of costs. But knowing the difference between the costs will help you see why you need irrelevant and incremental costs included in your finance (Berrry, 2005). It's a prudent idea to compare all costs such as sunk costs, incremental costs, relevant and irrelevant costs and then determine how much you want to focus on each individual cost (Young, 2003). Then one can determine how much money should be set aside in different accounts to pay for these costs. For instance, if you see that you have a sunk cost, your account for incremental costs may be able to pick up the slack for it until you can eliminate the sunk cost.

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