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By excluding all such information, relevant
costing provides a powerful approach to simplify the decision context
while ensuring that the economically salient factors are highlighted.
It is this aspect of relevant costing that provides the rationale for
the classification of costs as fixed or variable in relation to important
decision variables such as output. Costs that remain fixed in the short-term
regardless of output level can be excluded from a relevant cost analysis
for short-term output decisions. The costs that will be affected by output
level (variable costs) are normally be the only relevant product costs
in this type of decision situation. Where these costs may be set against
the revenues gained by selling units of output, the net amount, contribution,
is often the key economic variable affected by output decisions. This
situation is illustrated by simple cost-volume-profit analyses.
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Alternatives Considered
In order to make a decision you must select from
alternative courses of action. The proper specification of all the alternative
courses of action, and their economic consequences is needed for rational
economic decision analyses. In relevant cost terms, each decision should
be evaluated against the next best alternative. On this basis the relevant
cost of taking a particular decision will include the costs associated
with foregoing the next best alternative decision. Economists term such
costs 'opportunity costs' because they relate to opportunities removed
by the decision Example: The relevant cost of a decision to keep an
asset will normally be the amount that you would expect to get from
selling it (its realisable value). The cost of employing workers to
do a particular job might be the cost of the wages paid.
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