Define and discuss the relevance of cost allocations.

Module 2 – Home

Relevant Information for Decision Making

Modular Learning Outcomes

Upon successful completion of this module, the student will be able to satisfy the following outcomes:

•Case ◦Identify the relevant costs in a decision-making situation.
◦Describe the special relevant costs in multinational decision making.

•SLP ◦Identify the relevant costs in an organization of interest to each student.

•Discussion ◦Define and discuss the relevance of cost allocations.

Module Overview

One of the most important decisions to make in generating information to assist in decision-making is to select only that information that is relevant to that decision. This is particularly important when decisions are made in a multi-national environment.

Recall that in the second module we demonstrated that historical cost was an inappropriate measurement for assets in most circumstances, as the historical cost will not change no matter what decision is made.

Here is the single most important guideline for selecting relevant costs for any decision-making situation: a cost that does not change when alternate decisions are selected is not relevant to that decision.

Here are some follow-up generalizations. As with all generalizations, there will always be exceptions.
1.In general, sunk costs are not relevant because they cannot be avoided in a decision. They have already been incurred or are committed to be incurred in the future. Remember that committed costs are a form of sunk costs.
2.In general, historical costs are not relevant because they will be the same regardless of the option made. (The major exception is the impact of historical costs on taxes.) An alternative is the use of current market prices for assets.
3.In general, opportunity costs are relevant if the opportunities are different between or among the options.
4.In a make-or-buy situation, all costs and revenues that are different between the option to make and the option to buy are relevant.