[SOLVED] Relevant Costs
Im working on a Accounting question and need guidance to help me study.
Discussion Topic 1: Relevant Costs
- What is a relevant cost?
- What is meant by opportunity cost?
- Provide a scenario illustrating analysis of relevant cost and opportunity cost in a make or buy scenario.
Just do response each posted # 1 to 3 only
A relevant cost is refers to the incremental and avoidable cost of implementing a business decision. These cost are cost that are related to a change of cash flows. A opportunity cost is the potential loss when making a decision between alternatives when producing a product or performing a service. A make or buy scenario that would be for a company that produces piston rings were there is the option to buy them at one dollar a piece or produce them themselves that includes the relevant cost of labor and parts to produce the piston rings. The opportunity cost would be to make the piston rings them self or purchase from supplier.
- When comparing costs to determine if we should accept a project or order, we must first analyze the cost comparison to see if we will benefit from taking the order. A cost that is different between the scenarios are considered a relevant cost because those costs are going to factor into the end decision (Weygandt, Kimmel, & Kieso, 2018). An example of a relevant cost is the difference in the amount of direct material costs between two products that you must decide which one to produce.
- An opportunity cost is a cost that we lose to gain another cost. In the last unit, we talked about sales ratios, and which products we should choose to produce which will give us the most income when we have limited resources. If we had a company and had to choose to produce between item a and item b, and then choose item a, the revenue lost from item b is the opportunity cost.
- A scenario that I can use is from a laser engraving business. If I wanted to make identification tags for emergency services, I can do one of two things. I can buy the sheet of plastic and have the laser cut out each tag and engrave them, or I can buy the tags pre-cut and then laser engrave the responders information on each tag. The difference in material costs is a relevant cost, as it will help determine my decision. For the opportunity cost, if by using a plain sheet and doing the cutting and engraving, my profit per tag is $2.00 dollars, and if I buy the tags and just engrave them for a profit per tag of $1.50, I am going to go with option a and buy the sheets to maximize my profit. The opportunity cost is the $1.50 I will lose with each tag by not going with option b, in order to make an extra $.50 cents per tag by using option a.
- Relevant cost is a managerial accounting term that describes avoidable costs that are incurred only when making specific business decisions.
- Opportunity costs represent the benefits an individual, investor or business misses out on when choosing one alternative over another.
- In regards to this week’s DB, I would say that a great example of an opportunity cost would be buy a computer versus build a computer. This one I use because I have personally been struggling with this the past couple of years. I could easily buy a pre-built computer but I lose on the opportunity of having current parts and/or having to upgrade. Another viewpoint on it is that if I were to buy a pre-built computer I could enjoy games now but the opportunity cost where I could save up to build a better PC has me not capable of playing some of the newer games when they come out for the new gen next year. I am aware it isn’t a management point of view but the same application is there. I could buy the parts and make a PC or i could just buy a PC. Granted I am not making any parts it seems like but I could indeed create a case or buy one. is it cheaper for me to use a 3d printer, buy materials, or buy the case. The relevant cost I believe I wrapped in with the opportunity. If i were supposed to give a number problem please respond and will adjust accordingly.