Page 5 - PowerPoint Presentation

DECISION MAKING

Relevant Costs/Benefits

• When making a decision only relevant costs/benefits are taken
into account.

General rule:

• A cost/benefit is relevant if it can be avoided

• i.e. by not taking that decision the cash flow is not incurred

• A cost/benefit is not relevant if it cannot be avoided

• i.e. the cash flow is incurred irrespective of the decision made / cash
flows that are the same for all alternatives

• Definition: A relevant cost/benefit is a

• future

• A cost incurred in the past (sunk cost)/ future spending already committed to in the
past is not relevant
• cash flow

• Depreciation/ absorbed overheads are not relevant. Actual
overheads are relevant

• arising as a direct consequence of a decision
• Only incremental/differential costs are taken into account

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