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Chapter 6

Example 1

Identify which of the following costs are relevant to the decisions specified:

(a) The salary to be paid to a market researcher who will oversee the
development of a new product. This is a new post to be created
especially for the new product but the £12,000 salary will be a fixed cost.

Is this cost relevant to the decision to proceed with the
development of the product?

The salary is a relevant cost of £12,000. Do not be fooled by the mention
of the fact that it is a fixed cost, it is a cost that is relevant to the decision
to proceed with the future development of the new product. This is an
example of a directly attributable fixed cost. A directly attributable fixed
cost may also be called a product- specific fixed cost.

(b) The £2,500 additional monthly running costs of a new machine to be
purchased to manufacture an established product. Since the new
machine will save on labour time, the fixed overhead to be absorbed by
the product will reduce by £100 per month.

Are these costs relevant to the decision to purchase the new
machine?

The £2,500 additional running costs are relevant to the decision to
purchase the new machine. The saving in overhead absorption is not
relevant since we are not told that the total overhead expenditure will be
altered. The saving in labour cost would be relevant but we shall assume
that this has been accounted for in determining the additional monthly
running costs.

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