Chapter 5: Short-Term Decision Making

Study Guide Highlights

What makes a cost relevant

Relevant costing filters accounting information so that the decision is based on future cash consequences that differ between alternatives. Sunk costs, non-cash charges and committed costs may be present in the records but still be irrelevant to the choice. Labels such as fixed or variable do not decide relevance by themselves; the circumstances determine whether the cash flow changes.

Opportunity cost and resources

Using an existing resource can have a cost even when no new invoice is created. Opportunity cost is developed through materials, labour and assets, focusing on what the organisation gives up by using a resource in one way rather than another. Spare capacity, alternative work, resale opportunities and replacement needs can therefore change the relevant amount, even when the historical accounting cost remains unchanged.

Choosing between operating alternatives

Make-or-buy, supply-or-buy-in and closure decisions all require attention to the financial effects that genuinely change. Avoidable costs are distinguished from allocated costs that would simply be redistributed, and contribution lost from costs saved. This keeps the analysis tied to the organisation's overall cash position rather than to an apparent product or departmental profit calculated for reporting purposes.

Further processing and wider judgement

Whether an output should be sold at an intermediate stage or processed further is also considered, along with how relevant costing can support quotations and one-off decisions. Financial comparison remains central, but it is not the whole decision. Supplier reliability, employee effects, customer reaction, capacity use and other knock-on consequences may matter when management moves from a calculation to a recommendation.