MODULE 1
Using Accounting Information in Decision Making, Relevant Costs and Benefits
Exercise I:
1. The steps in the decision-making process are first, identify the problem encountered,
then develop specific criteria for making final decision, then identify possible alternatives,
then develop decision model considering decision criteria, constraints and formulated
alternatives, then collect the data and lastly, selecting best alternative. The role of
accountant in them is from steps 1-5 and their main responsibility is to give managerial
advice and make recommendations using knowledge and understanding through data
gathering and analysis.
2. The characteristics of relevant cost are: (1) future oriented, and (2) can differ between
decision alternatives considered.
3.
a. Differential cost is the net difference in cost/benefit between alternatives and are
considered relevant cost.
b. Opportunity cost refers to income or benefit sacrificed or foregone when other
alternative is chosen, which is also relevant to a decision.
c. Avoidable costs are costs that will be saved or not incurred if a certain decision is
made, and considered relevant in decision-making process.
d. Sunk cost refers to irrecoverable costs incurred in the past and irrelevant for
decision making because their value isn’t expected to change for both
alternatives.
4. No, we can consider variable costs as relevant if and only if the general rule of
identifying relevant cost has been met which are “future” and “different”.
5. No, because we cannot say that all fixed costs are generally sunk costs in nature,
otherwise the portion of fixed cost could be eliminated or avoided in case the
management decides to choose the other alternative is considered “relevant”. Once the
fixed costs have already been incurred, it should be considered as sunk costs, which
actually belongs to irrelevant cost. The rule can also be applied in variable costs.
6. No, based on the definition of the two, variable cost is a cost that changes total amount
in direct proportion due to the level of activity; meanwhile a differential cost is the net
advantage/disadvantage between two chosen alternatives. If the level of activity is the
same for the two alternatives, it may not affect the variable cost at all and will be
considered as ‘irrelevant’.
7. No, because there are some points that a cost may be a future cost, yet it will not differ
under each alternative course of action, so the future cost can be “irrelevant”. In other
words, the future costs which may differ from other alternatives can be classified as
“relevant”.
8. In this case, the costs of the product line that would be relevant to this decision is the
avoidable costs like the materials, labor and overhead that will no longer be incurred as
the product line dropped. Costs that may be considered irrelevant are such irrecoverable
costs which can no longer affect a decision between alternatives to be chosen.
Exercise II:
Case 1 Case 2
Relevant Not Relevant Relevant Not Relevant
a. Sales revenue / /
b. Direct materials / /
c. Direct labor / /
d. Variable manufacturing overhead / /
e. Depreciation–Model B100 machine / /
f. Book value – Model B100 machine / /
g. Disposal value – Model B100 machine / /
h. Market value – Model B300 machine
/ /
(cost)
i. Fixed manufacturing overhead (general) / /
j. Variable selling expense / /
k. Fixed selling expense / /
l. General administrative overhead / /
Exercise III:
Material A – There is no units already in stock for Material A. The only thing to consider is to buy
a product at its replacement cost of P16.00. Therefore, the relevant cost of Material A for the
special job is P 16,000 ( 10,000 units required x P 16.00 replacement cost per unit )
Material B – This material is regularly used in the company,
