Is Book Value A Relevant Cost?

What is a relevant example?

The definition of relevant is connected or related to the current situation.

An example of relevant is a candidate’s social view points to his bid for presidency.

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How do you determine relevant costs?

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.

How do we determine if a cost or revenue is relevant?

In cost accounting, relevant means that you consider future revenue and expenses. Also, relevant means that a cost or revenue will change, depending on a decision you make. Past costs are water under the bridge, and if the costs or revenue remain the same no matter what you decide, they aren’t relevant.

Is replacement cost a relevant cost?

If plant and machinery is to be replaced at the end of its useful life, then the relevant cost is the current replacement cost. If plant and machinery is not to be replaced, then the relevant cost is the higher of the sale proceeds (if sold) and the net cash inflows arising from the use of the asset (if not sold).

Are all future costs relevant in decision making?

The costs which should be used for decision making are often referred to as “relevant costs”. … a) Future: Past costs are irrelevant, as we cannot affect them by current decisions and they are common to all alternatives that we may choose.

What are the characteristics of relevant cost?

Two important characteristic features of relevant costs are ‘Occurrence in Future’ and ‘Different for Different Alternatives’. This does not mean that all costs which occur in future are not relevant cost. For a cost item to be relevant, both the conditions should be present.

Is book value a sunk cost?

Sunk costs are usually past or historical costs. For example, suppose a machine acquired for $50,000 three years ago has a book value of $20,000. The $20,000 book value is a sunk cost that does not affect a future decision involving its replacement.

Which of the following types of costs would not be considered a relevant cost?

Sunk costs are irrelevant, as they do not affect the future cash flows. Future costs, which cannot be altered, are not relevant as they will have to be incurred irrespective of the decision made. Non-cash expenses like depreciation are not relevant as they do not affect the cash flows of a firm.

Why sunk costs are considered irrelevant costs?

In both economics and business decision-making, sunk cost refers to costs that have already happened and cannot be recovered. Sunk costs are excluded from future decisions because the cost will be the same regardless of the outcome.

What are examples of relevant costs?

Example of Relevant Cost Almost all of the costs related to adding the extra passenger have already been incurred, including the plane fuel, airport gate fee, and the salary and benefits for the entire plane’s crew. Because these costs have already been incurred, they are sunk costs or irrelevant costs.

Are sunk costs relevant in decision making?

A sunk cost is a cost that cannot be recovered or changed and is independent of any future costs a business might incur. Because a decision made today can only impact the future course of business, sunk costs stemming from earlier decisions should be irrelevant to the decision-making process.