Advanced Cost Management Accounting Decision MakingI Avoidable Cost

Advanced Cost & Management Accounting Decision Making-I

Avoidable Cost This terminology is used where the decision is to be taken to discontinue a product. Avoidable costs are costs which would not be incurred if the activity to which they relate did not existing.

Unavoidable Cost which would be incurred whether or not the product is discontinued are known as unavoidable cost.

Controllable cost are items of expenditure which can be directly influenced by a given manager within a given time span. Controllable Cost Committed Discretionary

Committed fixed cost Depreciation and rent relating to property, plant and equipment Discretionary fixed cost Advertising and Research & development .

Differential Cost It can be incremental cost and avoidable Cost. Incremental cost It is a difference because of increase in activity level Avoidable cost It is a difference because of decrease in activity level

Example Ø If X product costs Rs 700 replaced with Y product costs Rs 800, the differential cost will be Rs 100 Ø Ø If X product costs Rs 1, 200 replaced with Y product costs Rs 1000 the avoidable cost will be Rs 200

Opportunity Cost An opportunity cost is the value of the benefit scarified when one decision is taken in preference to an alternative decision. x Contribution Margin s 800 y 1, 000 z 700

Sunk Cost Sunk cost, which have been charged already as a cost of production. A sunk cost is a past cost which is not directly relevant in decision making.

Fixed & Variable cost Fixed cost Variable cost Irrelevant cost

Fixed Cost Specific / Directly Attribute Relevant to decision making Incremental cost Avoidable cost General Fixed Overhead Cost Irrelevant to decision making

Incremental Cost It increases with an increase in activity level. Avoidable Cost This cost will decrease or entirely eliminate if a product drops or activity level reduce or shut down the operations.