Some relevent costs of Managerial Accounting--

To identify relevant costs and benefits we first describe “avoidable cost”.

AVOIDABLE COST

An avoidable cost is a cost that can be eliminated in whole or in part by choosing one alternative over another. By choosing the alternative of going to the movie, the cost of renting the videotape can be avoided, by choosing, the alternative of renting the video tape, the cost of the movie ticket can be avoided.

Only those costs and benefit that differ in total between alternatives are relevant in a decision. If a cost will be the same regardless of the alternative selected, then the decision has no effect on the cost and it can be ignored.

Avoidable costs are relevant costs. And unavoidable costs are irrelevant costs.

The Matter of Opportunity Cost

The economic benefits that are foregone as a result of pursuing some course of action. Opportunity costs are not actual dollar outlays and are not recorded in the accounts of an organization.

Two board categories of costs are never relevant in decision. These irrelevant costs are,

1. Sunk Cost

2. Future costs that do not differ between the alternatives.

Now short details about sunk cost and future cost.

SUNK COST

A sunk cost is a cost that has already been incurred and cannot be avoidable regardless what a manager decide to do. Sunk costs are always the same, no matter what alternative are being considered. And they are always irrelevant and they should be ignored.

FUTURE COST

Future costs that do not differ between the alternatives are relevant.

With this two types of costs, differential costs and joint costs are also needed for solve problems.

DIFFERENTIAL COST

Any cost that differs between alternative between a decision making situations. This term is synonymous with avoidable cost and relevant cost.

JOINT COST

Costs that are incurred up to the split off point in a process that produces joint products.

JOINT PRODUCTS

Joint products means, two or more items that are produced from a common input.

Joint products and joint costs are under the subject of multiple constraints. Example, a company may have limited row materials, limited direct labor-hours available, limited floor space, and limited advertising dollars to spend on product promotion.

How would it determine the right combination of products and produce?