Cost Accounting & Management Accounting Decision Making Lecture-42 Main Ahmad Farhan

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

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

Discretionary fixed cost Advertising and Research & development. 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. It is a difference because of increase in activity level Avoidable cost It is a difference because of decrease in activity level

Example If X product costs Rs 700 replaced with Y product costs Rs 800, the differential cost will be Rs 100 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 y z Contribution Margin 800 1,000 700 s

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 Irrelevant cost Variable cost Irrelevant cost

Relevant to decision making First Specific Second General Fixed over,,,,, Third Relevant to decision making appears and than hide Fourth Irrelevant to decision making appears and than hide Fifth incremental cost Sixth Avoidable cost Relevant to decision making Avoidable cost Incremental cost

Incremental Cost Avoidable 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.