ACCA F5: Ch 5 - Make Or Buy And Other Short-term Decisions

The statement is true because in short-run situations, fixed costs remain constant regardless of the alternatives being considered. Therefore, using the marginal costing approach, which focuses on sales, marginal cost, and contribution, is suitable in such scenarios. This approach helps in analyzing the profitability of different alternatives by considering the incremental costs and revenues associated with each option.

When no spare capacity exists, the relevant cost of making the product in-house includes the variable cost of internal manufacture (costs that vary with the production level), any fixed costs directly related to that product (costs that do not vary with the production level), and the opportunity cost of internal manufacture. The opportunity cost refers to the lost contribution from another product that could have been produced using the same resources. Therefore, the correct answer is the variable cost of internal manufacture plus any fixed costs directly related to that product plus the opportunity cost of internal manufacture (e.g. lost contribution from another product).

Opportunity cost is an important concept for decision-making purposes because it represents the value of the best alternative that is foregone when a particular course of action is chosen. This concept highlights that decisions involve making choices, and by selecting one plan, there may be sacrifices or missed opportunities in other areas of the business. By considering the opportunity cost, decision-makers can assess the potential benefits and drawbacks of different options and make more informed choices.

Sunk costs are costs that have already been incurred and cannot be recovered. These costs are irrelevant for decision making because they are already spent and cannot be changed. When making decisions, it is important to focus on future costs and revenues, as they are the ones that can be influenced and can impact the outcome of the decision. Therefore, sunk costs should not be considered when making decisions as they do not provide any useful information for the future.

The relevant cost of labor refers to the additional cost incurred when hiring more labor beyond the current capacity. It takes into account the extra expenses associated with hiring additional workers, such as wages, benefits, training, and any other costs directly related to the labor. This cost is considered relevant because it is specifically incurred due to the decision to hire more labor and is not already accounted for in the current capacity.

Relevant costs are future cash flows that are directly related to the decision being made. These costs are important because they can impact the decision-making process and help determine the financial impact of different options. By considering relevant costs, decision-makers can make more informed choices and evaluate the potential outcomes of their decisions. Therefore, the given answer "Relevant" accurately describes future cash flows that are directly linked to the decision under consideration.

The three elements of relevant costs are cash flows, future costs and revenues, and differential costs and revenues. Cash flows refer to the actual cash inflows and outflows that occur as a result of a decision. Future costs and revenues are the expected costs and revenues that will be incurred in the future. Differential costs and revenues are the difference in costs and revenues between two alternative courses of action. Depreciation costs and past costs and revenues are not considered relevant costs because they are not future-oriented and do not affect decision-making.

The relevant cost of labor refers to the cost that is directly applicable to a specific decision or situation. In this case, the question is asking about the relevant cost of labor when the company is operating at full capacity and cannot hire any additional labor. In this scenario, the only relevant cost of labor would be the opportunity cost of diverting labor from one task to another. This refers to the cost of forgoing the benefits or profits that could have been obtained if the labor had been used in its next best alternative use.

The given correct answer is "sunk". This means that any historic cost given for materials is considered a sunk cost. A sunk cost is a cost that has already been incurred and cannot be recovered. In the context of materials, the historic cost refers to the cost that was paid for the materials in the past. This cost is not relevant for decision-making unless it happens to be the same as the current purchase price. Therefore, the historic cost of materials is considered a sunk cost and should not be factored into decision-making processes.

A product should be made in-house if the relevant cost of making the product in-house is less than the cost of buying the product externally.

The relevant cost of materials refers to the cost that is considered when making decisions about the use and replacement of materials. In this case, the relevant cost is determined by the current purchase price of the materials. This means that when evaluating whether to continue using the materials or replace them, the current purchase price is the most important factor to consider. Other costs such as opportunity cost (e.g. lost scrap value or lost contribution) and historic cost may also be considered, but the current purchase price takes precedence.

The relevant cost of materials refers to the cost that is pertinent to a specific decision or situation. In this case, the relevant cost includes the opportunity cost, which can be the lost scrap value or lost contribution. This means that when considering the cost of materials, it is important to take into account the potential value that could be lost if the materials are not used or if they are used in a different way. The current purchase price and historic cost may also be relevant, but the opportunity cost specifically focuses on the potential value that could be lost.

The minimum contract price = the total of the relevant cash flows associated with the contract.

If the contract price does not cover these cash flows then it should be rejected.

In the long run (and sometimes in the short run) fixed costs do change and accordingly the differential costs must include any changes in the amount of fixed costs.

The correct answer is "the variable cost of internal manufacture plus any fixed costs directly related to that product." This is because when spare capacity exists, the company can produce the product in-house without incurring any additional fixed costs. Therefore, the relevant cost of making the product in-house would only include the variable cost of internal manufacture and any fixed costs directly related to that product. The opportunity cost of internal manufacture, which is the lost contribution from another product, is not relevant in this scenario as there is spare capacity available.

The relevant cost of labor refers to the cost that is directly associated with the specific decision being made. In this case, the spare capacity is being considered. Since there is no extra cost of labor or opportunity cost of diverting labor involved, the relevant cost is determined to be nil, meaning there is no additional cost associated with utilizing the spare capacity of labor.

The relevant cost of materials refers to the cost that is directly applicable to the decision being made. In this case, the relevant cost is the current purchase price of the materials. This means that when considering the cost of materials, only the current price at which they can be purchased should be taken into account. Other factors such as the opportunity cost (such as lost scrap value or lost contribution) and the historic cost are not relevant in this context.

The answer states that penalties and other costs resulting from the closure, reorganisation costs, and additional contribution from the alternative use for resources released may not be known with certainty. This suggests that there is uncertainty surrounding these factors and their impact on the decision to shut down. Additionally, the answer mentions the knock-on impact of the shut-down decision, which implies that there may be unforeseen consequences or ripple effects from the closure.

The term "differential" refers to the difference between costs and revenues that are affected by a decision. It implies that only the costs and revenues that change as a result of a decision are relevant, while factors that are common to all alternatives can be ignored. This concept is important in decision-making as it helps to focus on the relevant information and avoid considering irrelevant factors.

When deciding whether to process a product further or sell it after split-off, only future incremental cash flows should be considered. This means that any difference in revenue and any extra costs that will be incurred by further processing should be taken into account. Joint costs, which are the costs incurred before the split-off point, are sunk costs and are not relevant to the decision-making process. The focus should be on the potential additional revenue and costs that can be generated by further processing the product.

To evaluate a decision accurately, only the actual cash flows should be considered. Non-cash items such as depreciation and interdivisional charges should be ignored because they do not involve actual cash inflows or outflows. By focusing on the actual cash flows, decision-makers can assess the true financial impact of a decision and make more informed choices.

The answer includes all the quantifiable costs and benefits of closure. It mentions the lost contribution from the area being closed, which refers to the financial impact of no longer generating revenue or profit from that area. It also includes savings in specific fixed costs from closure, meaning the cost savings that result from shutting down certain operations or processes. Additionally, it mentions known penalties and other costs resulting from the closure, which could include contractual obligations or legal fees. It also considers any known reorganization costs, which are the expenses associated with restructuring or reallocating resources. Lastly, it mentions the known additional contribution from the alternative use for resources released, which refers to the potential financial gain from utilizing the resources in a different way.

The correct answer includes a list of factors that management must consider before making a decision between buying externally or making in-house. These factors include the reliability of the external supplier, the presence of specialist skills required for the task, the potential alternative use of resources, social implications, legal considerations, confidentiality concerns, and customer reaction. All of these factors are important in evaluating the feasibility and potential risks of outsourcing the task to an external supplier.