CIMA BA2 Syllabus B. COSTING - Relevant Costs and Decision Making - Notes ^{8 / 8}

What is relevant costing?

This is a type of costing where we only include 'avoidable costs'.

Ignore irrelevant costs. 

There are 3 types of relevant costs

1. Future costs

   It must be expenditure incurred in the future will be included, anything incurred in the past will be ignored.

2. Cash flow costs

   It must be a cash flow, ignore accounting policies like depreciation.

3. Incremental costs

   It must be future variable costs, ignore fixed costs - unless the fixed costs increase because of the decision.

Relevant costing

Project A has the following expected results:

Sales $1,000
Direct materials ($400)
Direct labour ($100)
Overheads ($100)
Expected profit $400

Notes

- Included in the materials, are materials already in stock which cost $300 and can be sold for $100.

- Included in labour cost is $40 for a manager who has spare time from his duties.

- The overhead is an apportionment given to the project from the general overhead of the organisation. 

What is the profit after only relevant costs are considered?

• Solution

  Sales $1,000
  Direct materials ($400) - $300 (already with us) + $100 (amount lost because we did not sell) = ($200)
  Direct labour ($100) - ($40) (no additional cost to us) = ($60)
  Overheads ($100) - $100 (no additional cost to us) = 0
  Expected profit $740

Responsibility Accounting

Budget holders are responsible for their budget centre

But only the controllable (by the budget holder) costs and not the uncontrollable costs. 

There are 4 types of responsibility centres used to evaluate performance

1. Cost centre

   A manager here is only responsible for costs

2. Profit centre 

   A manager here is responsible for both revenue and costs (ie) profit

3. Revenue centre 

   A manager here is only responsible for revenue

4. Investment centre 

   A manager here is responsible for both daily profit and investment in non current assets / working capital and financing