Question

A relevant cost

1) Differs between the alternatives in a decision

2) Occurs in the future

For each of the following costs and decisions decide whether the cost is relevant or not relevant.

Cost		Decision
Unavoidable fixed overhead		Eliminate an unprofitable segment
Direct labour		Make or buy
Original cost of old equipment		Replace equipment
Joint production costs		Sell or process further
Opportunity cost		Accept a special order
Segment manager's salary		Eliminate an unprofitable segment (The manager will be terminated)
Cost of new equipment		Replace equipment
Incremental production costs		Sell or process further
Direct materials		Replace equipment (The amount of materials required does not change)
Rent expense		Purchase or lease a building

Answer 1

Cost	Decision	Relevant/Irrelevant	Reason
Unavoidable fixed overhead	Eliminate an unprofitable segment	Irrelevant	Not relevant as fixed overhead will be incurred irrespective of decision
Direct labor	Make or buy	Relevant
Original cost of old equipment	Equipment replacement	Irrelevant	Not relevant as Sunk cost/Cost already incurred
Joint production costs	Sell or process further	Irrelevant	Not relevant as Sunk cost/Cost already incurred
Opportunity cost	Accepting a special order	Relevant
Segment manager’s salary	Eliminate an unprofitable segment	Relevant
Cost of new equipment	Equipment replacement	Relevant
Incremental production costs	Sell or process further	Relevant
Direct materials	Equipment replacement(materials does not change)	Irrelevant	Not relevant as same for different alternatives
Rent expense	Purchase or lease a building	Relevant