ACKNOWLEDGEMENT
Author: Marie Janse van Rensburg
Cost & Management Accounting 3B
CNA33B3
Additional learning material – Unit 1
ITS / Oracle item codes
Last updated: July 2024
Copyright © University of Johannesburg, South Africa
Printed and published by the University of Johannesburg
© All rights reserved. Apart from any fair dealing for research, criticism or review as permitted under the Copyright Act 98 of 1978, no part of this material may be
reproduced, stored in a retrieval system, transmitted or used in any form or be published, redistributed or screened by any means electronic, photocopying, recording
or otherwise without the prior written permission of the University of Johannesburg.
1
,Contents
1. Learning outcome ............................................................................................................ 3
2. Assessment Criteria ........................................................................................................ 3
3. Resources ......................................................................................................................... 3
4. Introduction: ...................................................................................................................... 3
5. Concepts ........................................................................................................................... 5
5.1 Relevant cost ............................................................................................................... 5
5.1.1 Relevant cost of material ................................................................................. 8
5.1.2 Relevant cost of labour..................................................................................... 9
5.2 Opportunity cost .......................................................................................................... 9
5.3 Incremental cost/revenue........................................................................................... 10
6. Types of decisions ........................................................................................................ 10
6.1 One-time-only special order ...................................................................................... 10
6.2 Short-term pricing decisions ..................................................................................... 13
6.3 Insourcing versus Outsourcing (Make or Buy) ......................................................... 13
6.4 Product-mix decision with capacity constraints ........................................................ 14
6.5 Customer profitability and relevant costs.................................................................. 15
6.6 Equipment/Asset replacement decisions ................................................................... 18
7. Qualitative factors.......................................................................................................... 18
8. Summary ........................................................................................................................ 19
9. Specific rules .................................................................................................................. 19
10. Example 2.................................................................................................................... 20
11. Useful tables.................................................................................................................. 23
12. Class Activities ............................................................................................................ 24
13. Lab Activities ............................................................................................................... 25
14. Tutorial Questions ......................................................................................................... 29
15. Bibliography ................................................................................................................. 34
2
,UNIT 1 – Relevant costing and short-term decision-making
1. Learning outcome
Students should be able to:
• Identify, apply and evaluate short-term decision-making techniques by
incorporating relevant costing principles;
• Evaluate the qualitative factors that could influence the particular short-term
decision.
2. Assessment Criteria
• Calculate limiting factors / scarce resources and advise on the optimum
product mix.
• The relevant costs for decision-making are accurately measured.
• Relevant and irrelevant costs and benefits are correctly differentiated.
• Possible decisions and courses of action are accurately compared for special
order, make or buy, and discontinuation decisions.
• The best decision, taking into account the information available, is made
correctly.
• Qualitative factors that affect the decision are clearly explained and identified.
3. Resources
Horngren 17th Edition Chapter 12
Additional learning material
Videos
Video links
Class questions
Tutorial questions
Lab questions
Challenge box
4. Introduction:
This unit will focus on measuring the costs and benefits of non-routine decisions.
Decision-making involves a choice between two or more decisions (alternatives)
and should only consider the relevant cash flows of the decision. Chapter 12 in the
prescribed textbook explains that 'special studies' sometimes refer to decisions not
routinely made at frequent intervals. In other words, special studies are
undertaken whenever a decision (that does not usually form part of the business
activities) needs to be taken. Examples of these non-routine decisions are:
• Whether to accept a one-time-only special order
• Short-term pricing decisions
3
, • Outsourcing (making a component within the company or rather buying from an
outside supplier);
• Product mix decisions when capacity constraints exist (optimum production to
maximise profit).
• Customer profitability and relevant costs
• Equipment replacement decisions
Investopedia describes relevant costing as a management accounting term that
describes income and costs specific to management's decisions. The concept of
relevant income or costs eliminates unnecessary data that could complicate decision-
making. Relevant income or costs are decision-specific, meaning that a relevant
income or cost may be applicable in one decision but not applicable (irrelevant) in
another decision.
These special studies require only those costs and income that are relevant (that
matter) to the specific alternative course of action to be reported. A cost or income
item is relevant when it is different between two different alternative decisions and
when it is a future cost or income. Thus, the term 'decision-relevant approach'
describes the specific costs and benefits (income) that should be reported for
special studies. Increment costs or income (revenues) are synonyms for relevant costs
or revenues. When examining alternative courses of action, the objective is to
maximise the present value of future net cash inflows.
Important:
Net cash flow is the difference between additional revenue (increasing net cash
flow) and additional costs (decreasing net cash flow).
Also, net cash flow is the difference between cost savings (increasing net cash
flow) and lost revenue (decreasing net cash flow).
Tip:
Preferred method: When attempting a relevant costing question, it is essential to
indicate those items that will increase net cash flow as a positive amount and those
that will decrease net cash flow as a negative amount.
Remember to describe each amount and whether it is a cash inflow or a (cash
outflow). No marks will be allocated if this is not adhered to.
A cash inflow can be revenue, or it can be a cost-saving.
A cash outflow can be a cost, or it can be lost revenue.
4
Author: Marie Janse van Rensburg
Cost & Management Accounting 3B
CNA33B3
Additional learning material – Unit 1
ITS / Oracle item codes
Last updated: July 2024
Copyright © University of Johannesburg, South Africa
Printed and published by the University of Johannesburg
© All rights reserved. Apart from any fair dealing for research, criticism or review as permitted under the Copyright Act 98 of 1978, no part of this material may be
reproduced, stored in a retrieval system, transmitted or used in any form or be published, redistributed or screened by any means electronic, photocopying, recording
or otherwise without the prior written permission of the University of Johannesburg.
1
,Contents
1. Learning outcome ............................................................................................................ 3
2. Assessment Criteria ........................................................................................................ 3
3. Resources ......................................................................................................................... 3
4. Introduction: ...................................................................................................................... 3
5. Concepts ........................................................................................................................... 5
5.1 Relevant cost ............................................................................................................... 5
5.1.1 Relevant cost of material ................................................................................. 8
5.1.2 Relevant cost of labour..................................................................................... 9
5.2 Opportunity cost .......................................................................................................... 9
5.3 Incremental cost/revenue........................................................................................... 10
6. Types of decisions ........................................................................................................ 10
6.1 One-time-only special order ...................................................................................... 10
6.2 Short-term pricing decisions ..................................................................................... 13
6.3 Insourcing versus Outsourcing (Make or Buy) ......................................................... 13
6.4 Product-mix decision with capacity constraints ........................................................ 14
6.5 Customer profitability and relevant costs.................................................................. 15
6.6 Equipment/Asset replacement decisions ................................................................... 18
7. Qualitative factors.......................................................................................................... 18
8. Summary ........................................................................................................................ 19
9. Specific rules .................................................................................................................. 19
10. Example 2.................................................................................................................... 20
11. Useful tables.................................................................................................................. 23
12. Class Activities ............................................................................................................ 24
13. Lab Activities ............................................................................................................... 25
14. Tutorial Questions ......................................................................................................... 29
15. Bibliography ................................................................................................................. 34
2
,UNIT 1 – Relevant costing and short-term decision-making
1. Learning outcome
Students should be able to:
• Identify, apply and evaluate short-term decision-making techniques by
incorporating relevant costing principles;
• Evaluate the qualitative factors that could influence the particular short-term
decision.
2. Assessment Criteria
• Calculate limiting factors / scarce resources and advise on the optimum
product mix.
• The relevant costs for decision-making are accurately measured.
• Relevant and irrelevant costs and benefits are correctly differentiated.
• Possible decisions and courses of action are accurately compared for special
order, make or buy, and discontinuation decisions.
• The best decision, taking into account the information available, is made
correctly.
• Qualitative factors that affect the decision are clearly explained and identified.
3. Resources
Horngren 17th Edition Chapter 12
Additional learning material
Videos
Video links
Class questions
Tutorial questions
Lab questions
Challenge box
4. Introduction:
This unit will focus on measuring the costs and benefits of non-routine decisions.
Decision-making involves a choice between two or more decisions (alternatives)
and should only consider the relevant cash flows of the decision. Chapter 12 in the
prescribed textbook explains that 'special studies' sometimes refer to decisions not
routinely made at frequent intervals. In other words, special studies are
undertaken whenever a decision (that does not usually form part of the business
activities) needs to be taken. Examples of these non-routine decisions are:
• Whether to accept a one-time-only special order
• Short-term pricing decisions
3
, • Outsourcing (making a component within the company or rather buying from an
outside supplier);
• Product mix decisions when capacity constraints exist (optimum production to
maximise profit).
• Customer profitability and relevant costs
• Equipment replacement decisions
Investopedia describes relevant costing as a management accounting term that
describes income and costs specific to management's decisions. The concept of
relevant income or costs eliminates unnecessary data that could complicate decision-
making. Relevant income or costs are decision-specific, meaning that a relevant
income or cost may be applicable in one decision but not applicable (irrelevant) in
another decision.
These special studies require only those costs and income that are relevant (that
matter) to the specific alternative course of action to be reported. A cost or income
item is relevant when it is different between two different alternative decisions and
when it is a future cost or income. Thus, the term 'decision-relevant approach'
describes the specific costs and benefits (income) that should be reported for
special studies. Increment costs or income (revenues) are synonyms for relevant costs
or revenues. When examining alternative courses of action, the objective is to
maximise the present value of future net cash inflows.
Important:
Net cash flow is the difference between additional revenue (increasing net cash
flow) and additional costs (decreasing net cash flow).
Also, net cash flow is the difference between cost savings (increasing net cash
flow) and lost revenue (decreasing net cash flow).
Tip:
Preferred method: When attempting a relevant costing question, it is essential to
indicate those items that will increase net cash flow as a positive amount and those
that will decrease net cash flow as a negative amount.
Remember to describe each amount and whether it is a cash inflow or a (cash
outflow). No marks will be allocated if this is not adhered to.
A cash inflow can be revenue, or it can be a cost-saving.
A cash outflow can be a cost, or it can be lost revenue.
4
