1. Management Accounting3
Opportunity cost

2. A Five-step Decision Making Process in Planning & Control
Identify the problem and uncertainties
Obtain information
Make predictions about the future
Make decisions by choosing between alternatives
Implement the decision, evaluate performance, and learn

3. Cost Classifications For Decision Making
Every decision involves a choice between at least two alternatives.
The goal of making decisions is to identify those costs that are either relevant or irrelevant to the decision. Costs and benefits that differ between alternatives are relevant in a decision.

4. Cost Concept
Cost is a source of sacrifice to achieve specific objective.

5. Cost of What? Cost Unit
Cost units is a unit of quantity of product, service or time in relation to which costs may be ascertained or expressed. The cost will be ascertained on the base of historical or budgeted cost regarding sacrifice relating to cost unit.

6. Cost of What? Cost Unit
Cost unit will be determined on the base of cost-benefit approach. In ascertaining cost of a unit the benefits must be taken into consideration and useless and unnecessary cost calculations must be avoided.

7. For What the Cost will be Ascertained? The Goal Of Cost Calculations
Cost can be calculated for different purposes. The purpose changes the approach to the cost.

8. For What the cost will be ascertained? The Goal of Cost Calculations
Example: The cost occurred in March for ABC Furniture Manufacturing Company are as follows. While the monthly normal production capacity is unit, company manufactured piece of future in March.
Furniture Manufacturing Company Monthly Costs
Total Cost
Unit Cost
Steel Profile (Variable)
1.500
0,6
Wooden Materials (Variable)
1.250
0,5
Direct Labor (Variable)
2.100
0,84
Indirect Labor (Variable)
900
0,36
Utility Cost Of Factory Machinery (Variable)
800
0,32
Selling Cost (Fixed)
700
0,28
Depreciation Cost Of Factory Building And Machinery (Fixed)
1.800
0,72
Transportation Cost (Fixed)
600
0,24
Administrative Cost (Fixed)
850
0,34
10.500
4,2

9. For What the cost will be ascertained? The Goal of Cost Calculations
Decision
Production Cost?
Selling Price?
Selling Price For Covering Factory Costs?
Selling Price For Additional Order (Additional Production)
Selling Price For Additional Order (Existing Production)

10. Cost Concepts Relevant Cost (Geçerli, Uygun Maliyet)
Costs that are affected by decisions are relevant costs.
These are expected future costs, that will differ between alternatives. Future variable costs generally become relevant for decision making, while fixed costs may be irrelevant, if they do not change in total.
In the same way if an item of future cost remains same for two or more alternatives, it becomes irrelevant for the decision making.

11. FOR ADDITIONAL ORDER Unit Cost (TL) Production Cost
Normal Selling Price
Selling Price That Cover Factory Costs
Selling Price For Additional Production
Selling Price For Existing Production
Steel Profile (Variable)
0,6
Wooden Materials (Variable)
0,5
Direct Labor (Variable)
0,84
Indirect Labor (Variable)
0,36
Utility Cost Of Factory Machinery (Variable)
0,32
Selling Cost (Fixed)
0,28 -
Depreciation Cost Of Factory Building And Machinery (Fixed)
0,72
Transportation Cost (Fixed)
0,24
Administrative Cost (Fixed)
0,34
Relevant Cost
3,34
4,2
3,58
2,62
Opportunity Cost***
Selling Price
5,25 3

12. Cost Concepts Opportunity Cost
Opportunity cost (Fırsat Maliyeti) It is the value of a benefit sacrificed in favor of an alternative course of action. It is the measurable advantage foregone as a result of the rejection of best alternative uses of resources, whether of materials, labor or facilities.

13. Cost Concepts Opportunity Cost
Opportunity cost It is the maximum available contribution to profit forgone by using limited resources of a particular purpose. This cost does not involve any cash outlay and is computed only for the purpose of comparison in the context of managerial decisions.

14. FOR ADDITIONAL ORDER
Production Cost
Normal Selling Price
Selling Price That Cover Factory Costs
Selling Price For Additional Production
Selling Price For Existing Production
Steel Profile (Variable)
Wooden Materials (Variable)
Direct Labor (Variable)
Indirect Labor (Variable)
Utility Cost Of Factory Machinery (Variable)
Selling Cost (Fixed)
Depreciation Cost Of Factory Building And Machinery (Fixed)
Transportation Cost (Fixed)
Administrative Cost (Fixed)
Relevant Cost
Opportunity Cost (Sacrificed Benefit) 5,25
Selling Price 3
ABC Company satisfies the demand from existing production. So the sacrificed benefit (income) will be the cost of this choice.

15. Cost Concepts Relevant Cost -IllustrationTL
Water and Glucose Syrup (Variable)
1.500
Chemicals (Variable)
3.500
Packing Material (Variable)
500
Factory Utility Cost (Variable)
1.200
Direct Labor Cost (Variable)
2.000
General Administrative Cost (Fixed)
1.000
Factory Building Depreciation Cost (Fixed)
700
Machinery Depreciation Cost (Fixed)
800
Storing and Distributing Cost (Fixed)
900
Selling Cost (Fixed)
400
Total
12.500
Ex: ABC Co. produces 2 liters of plastic bottle soft drinks and sells them in domestic market at an unit price of 2 TL.
While the company operates in full capacity in May to October (6 months) the rest months of the year works at 75 % capacity.
Company has produced bottle of soft drinks in June and the incurred costs are as follows:

16. For What the cost will be ascertained? The Goal of Cost Calculations
Decision
Company intends to gain at least 20% profit margin. Evaluate whether the selling price will meet the goal of the company?
What is the minimum selling price that covers factory costs?
Company received an additional order involving 200 bottles of soft drinks, priced at 10 TL. The storing and distribution costs will be undertaken by the customer. Evaluate the selling price for additional order
Cause additional production?
Can be supplied from existing production?

17. June
100% Capacity
May-October 100% Capacity
October-May 75% Capacity
FOR ADDITIONAL ORDER
Selling Price That Cover Factory Costs
Cost (TL)
Unit Cost
Normal Selling Price
Unit Production Cost
Selling Price For Additional Production October-May
Selling Price For Existing Production May-October
Selling Price (At 20% Profit Margin) 15
 10
Water and Glucose Syrup (Variable)
1.500
1,5
Chemicals (Variable)
3.500
3,5
Packing Material (Bottles) (Variable)
500
0,5
Factory Utility Cost (Variable)
1.200
1,2
Direct Labor Cost (Variable)
2.000 2
Total Variable Cost
8.700 
9,5
Factory Building Depreciation Cost (Fixed)
700
0,7
0,93
Machinery Depreciation Cost (Fixed)
800
0,8
1,07
Total Fixed Costs
 1.500
General Administrative Cost (Fixed)
1.000 1
Storing and Distributing Cost (Fixed)
900
0,9
Selling Cost (Fixed)
400
0,4
Relevant Cost
12.500
12,5
11,0
11,5
14,1
12,5 x 1,2
Sacrificed benefit is selling price and storing and on the distribution cost will be benefit.
Opportunity cost = 15 -0,9 =14,1
REJECT THE ORDER

18. Cost Concepts Opportunity Cost
Ex: ABC Co. is a touristic business and would like to invest TL cash surplus for 3 months. Company has three investment alternatives: Alternative 1: Opening a bank account at an annual interest rate of %12. A withholding tax (stopaj) shall be applied by 10%. Alternative 2: Investing to a bond yielding a return of 3% monthly. Alternative 3: By paying in cash TL of advance for the next season’s reservation company intends to get an advantage of TL discount from seasonal costs. Requirements : Which alternative should be selected by the company (management) and explain the reason.

19. Cost Concepts Opportunity Cost
Decision
Opening a bank account at an annual interest rate of %12?
Investing to a bond yielding a return of 3% monthly?
By paying in cash TL of advance for the next season’s reservation company intends to get an advantage of TL discount from seasonal costs?

20. Cost Concepts Opportunity Cost in Decision Making
Alternative 1
 Alternative 2
Alternative 3
 EXPECTED RETURN
- Annual %12 interest rate
3.000   -  -
- Monthly 3% return
9.000
TL discount
10.000
EXPECTED COST
- 10% Withholding Tax
(300)
NET PROFIT
2.700
OPPORTUNITY COST
(Sacrificed Benefit)
(10.000)
(9.000)
NET ECONOMIC PROFIT/LOSS
(7.300)
(1.000)
1.000

21. Cost Concepts Opportunity Cost
Ex: ABC Co. is a car rental company and would like to invest 100 TL cash surplus. Company has three investment alternatives: Alternative 1: Investing to 100 unit gold of 1 TL unit price. Company intends to sell 100 unit gold at 2,9 TL unit price for the next year. Alternative 2: Investing to a year maturity treasury bond yielding a return of 84% annually. On the other hand 3 month maturity treasury bonds are issued quarterly. The quarterly return rate of 3 month maturity treasury bonds are as follows:
1st Quarter
60%
3rd Quarter
100%
2nd Quarter
90%
4th Quarter
200%
Alternative 3: Investing to US $ at a rate of 7,5TL per $ ($ 13,33 x 7,5=100) Next year the expected currency rate for the US $ is 22 TL.
Requirements : Which alternative should be selected by the company (management) and explain the reason.

22. A Year Maturity Treasury Bond 3 Month Maturity Treasury Bonds $
Alternative 1
 Alternative 2
Alternative 3
Gold
 A Year Maturity Treasury Bond
3 Month Maturity Treasury Bonds $
 Expected Return
- Selling Price
290 -  -
- Annual Interest Income 84
-Total Interest Income
164,140625
1st Quarter 15
2nd Quarter
25,875
3rd Quarter
35,21875
4th Quarter
88,046875
Exchange Income (Kur Geliri)
293
Expected Cost
- Initial Investment
(100)
Net Profit
190
≅164,15
193
Opportunity Cost
(193)
(190)
Net Economic Profit/Loss
(3)
(109)
(29) 3
100 x 0,84
100 × 3 month 0,60 12
115 × 3 month 0,90 12
140,875 × 3 month 1 12
176,09375 × 3 month 2 12