Is replacement cost a relevant cost?

If yes, the relevant cost is its replacement cost plus opportunity cost. The raw material stock must be restored to fulfil regular usage needs. Replacement cost is the actual cost to restore the stock level. If no, the relevant cost of the material is its opportunity cost i.e. the estimated net disposal value.

What are the examples of relevant costs?

The three main types of relevant cost examples considered during a business decision are:

  • Whether to make or buy.
  • Close a business unit or continue production.
  • Special orders.

Which of these are not relevant costs?

Relevant costs are costs that will be affected by a managerial decision. Irrelevant costs are those that will not change in the future when you make one decision versus another. Examples of irrelevant costs are sunk costs, committed costs, or overheads as these cannot be avoided.

Is disposal cost a relevant cost?

c) Cash flow: Expenses such as depreciation are not cash flows and are therefore not relevant. Similarly, the book value of existing equipment is irrelevant, but the disposal value is relevant.

Which of the following is a relevant cost?

The correct answer is c: replacement cost.

What is the meaning of replacement cost?

replacement cost. Replacement cost is the actual cost to replace an item or structure at its pre-loss condition.

Are fixed costs always irrelevant?

Answer and Explanation: Variable costs are always relevant, and fixed costs are always irrelevant.

How do you determine relevant cost?

The current purchase price of $22 will be used to determine the relevant cost of Material C as this will be the value of each unit purchased. The original purchase price of $20 is a sunk cost and so is not relevant. Therefore the relevant cost of Material C for the new product is (120 units x $22) = $2,640.

What is another name for a relevant cost?

Definition: Relevant cost, also called differential cost, is a management accounting term decsribing costs that pertain to a particular decision.

Are fixed costs relevant?

Fixed costs can be relevant but they have to be related to a specific decision. On the other hand, fixed costs that are general in nature (i.e. fixed costs that we incur regardless of whichever decision is made), would not be considered relevant.

Are overheads relevant costs?

Example of Relevant Costs
However, the cost of corporate overhead is not a relevant cost, since it will not change as a result of this decision. As another example, if ABC wants to close its medieval book division entirely, the only relevant costs will be those costs specifically eliminated as a result of the decision.

Which of the following costs is not relevant to an equipment replacement decision?

An avoidable cost is a cost that can be eliminated (in whole or in part) by choosing one alternative over another. A sunk cost is a cost that has already been incurred and cannot be avoided regardless of what action is chosen. The book value of old equipment is NOT a relevant cost in an equipment replacement decision.

What is a replacement cost in cost accounting?

Replacement cost is a term referring to the amount of money a business must currently spend to replace an essential asset like a real estate property, an investment security, a lien, or another item, with one of the same or higher value.

How is replacement cost applicable in accounting?

Replacement cost is the price that an entity would pay to replace an existing asset at current market prices with a similar asset. If the asset in question has been damaged, then the replacement cost relates to the pre-damaged condition of the asset.

What is an example of replacement cost?

Let’s look at a replacement costs example. If a company bought a machine for $1,000 five years ago, and the value of the asset today, less depreciation, is $300 dollars, then the book value of the asset is $300. However, the cost to replace that machine at current market prices may be $1,500.

What are the characteristics of relevant cost?


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What is meant by relevant costs?

‘Relevant costs’ can be defined as any cost relevant to a decision. A matter is relevant if there is a change in cash flow that is caused by the decision. The change in cash flow can be: additional amounts that must be paid. a decrease in amounts that must be paid.

What are opportunity costs examples?

A student spends three hours and $20 at the movies the night before an exam. The opportunity cost is time spent studying and that money to spend on something else. A farmer chooses to plant wheat; the opportunity cost is planting a different crop, or an alternate use of the resources (land and farm equipment).

What is another name for a relevant cost?

Definition: Relevant cost, also called differential cost, is a management accounting term decsribing costs that pertain to a particular decision.

Is insurance a relevant cost?

Sunk costs include historical costs that have been taken up or paid by the company, hence will not be affected by future decisions. Unavoidable costs are those that the company will incur regardless of the decision it makes. Good examples include committed fixed costs such as insurance and current depreciation.

Are fixed costs relevant?

Fixed costs, such as a factory lease or manager salaries, are irrelevant because the firm has already paid for those costs with prior sales.

Are overheads relevant costs?

Example of Relevant Costs
However, the cost of corporate overhead is not a relevant cost, since it will not change as a result of this decision. As another example, if ABC wants to close its medieval book division entirely, the only relevant costs will be those costs specifically eliminated as a result of the decision.