Relevant Costing

1. Relevant costs are future cash flows arising as a direct consequence of a decision. These costs are future and
incremental costs.

2. Relevant costs are also differential costs and opportunity costs. Differential cost is the difference in total cost
between alternatives. An opportunity cost is the value of the benefit sacrificed when one course of action is
chosen in preference to an alternative.

3. A sunk cost is a past cost which is not directly relevant in decision making.

4. In general, variable costs will be relevant costs and fixed costs will be irrelevant to a decision.

5. The relevant cost of an asset represents the amount of money that a company would have to receive if it
were deprived of an asset in order to be no worse off than it already is. We can call this the deprival value.

6. A limiting factor is a factor which limits the organization’s activities. In a limiting factor situation,
contribution will be maximized by earning the biggest possible contribution per unit of limiting factor.

7. If an organization has the freedom of choice about whether to make internally or buy externally and has no
scarce resources that put a restriction on what it can do itself, the relevant costs for the decision will be the
differential costs between the two options.

8. Some observers predict that in ten to 20 years, most organizations will have outsourced every part of the
value chain except for the few key components that are unique and sources of competitive advantage.

9. Any activity is a candidate for outsourcing unless the organization must control it to maintain its competitive
position or if the organization can deliver it on a level comparable with the best organizations in the world.

10. To minimize the risks associated with outsourcing, organizations generally enter into long-run contracts
with their suppliers that specify costs, quality and delivery schedules. They build close partnerships or alliances
with a few key suppliers, collaborating with suppliers on design and manufacturing decisions, and building a
culture and commitment for quality and timely delivery.