Chapter 9 – Relevant accounting (NB- will also be in exam):
Decision making:
One function of Management accounting is to provide management with RELEVANT
information based on which GOOD BUSINESS DECISIONS should be made
Example of such a business decision:
o EOH is a cloud service provider
o Mr Bohot said more companies were moving in-house IT functions to service
providers such as EOH and that trend, including cloud computing, would
continue to grow. EOH operates in an industry valued at R75 billion and
growing 7.5% a year.
o “Make or buy” decision
o Other important decisions to be made:
Discontinuing of operations
Special orders
Replacing old assets
o When decisions are made it should be determined whether the end result will
lead to relevant advantage or disadvantage for the business
Determined based on financial and non-financial factors
Financial factors (Quantitative):
Two options will be compared to each other and the difference in income and
expenses = relevant advantage / disadvantage
To test whether an income or expense is relevant, the following factors have to be
take into account:
1. Future costs (sunk costs are not relevant because relevant costs deals with the
future alternatives) AND
2. Cash flow
3. Differ between two options (only differential cash flows- cash flows that are the
same for the alternative are irrelevant)
Based on the above factors, depreciation is an example which would not be a relevant
cost because it is a sunk cost (allocates past costs to future periods) and is not a cash
flow.
Non financial factors (NB!! Will always be asked in test and exam):
Qualitative factors (factors that cannot be expressed in monetary terms) must also be
taken into account when making decisions. Which qualitative factors to list depend on
the question given? But examples include:
o Quality of service
o Sensitive information made available
o Decline in employee morale leading to redundancies.
P.5-6 Question 1
Special price decisions (based on other factors listed above – special orders):
1. Less than normal selling price (pricing decisions made outside the main market)
2. Very NB (will be in test)!! One can only accept a special order if there is spare
capacity (if it is not explicitly mentioned, it should be calculated whether spare
capacity does actually exist). There will always be enough information in the question
to calculate it.
Decision making:
One function of Management accounting is to provide management with RELEVANT
information based on which GOOD BUSINESS DECISIONS should be made
Example of such a business decision:
o EOH is a cloud service provider
o Mr Bohot said more companies were moving in-house IT functions to service
providers such as EOH and that trend, including cloud computing, would
continue to grow. EOH operates in an industry valued at R75 billion and
growing 7.5% a year.
o “Make or buy” decision
o Other important decisions to be made:
Discontinuing of operations
Special orders
Replacing old assets
o When decisions are made it should be determined whether the end result will
lead to relevant advantage or disadvantage for the business
Determined based on financial and non-financial factors
Financial factors (Quantitative):
Two options will be compared to each other and the difference in income and
expenses = relevant advantage / disadvantage
To test whether an income or expense is relevant, the following factors have to be
take into account:
1. Future costs (sunk costs are not relevant because relevant costs deals with the
future alternatives) AND
2. Cash flow
3. Differ between two options (only differential cash flows- cash flows that are the
same for the alternative are irrelevant)
Based on the above factors, depreciation is an example which would not be a relevant
cost because it is a sunk cost (allocates past costs to future periods) and is not a cash
flow.
Non financial factors (NB!! Will always be asked in test and exam):
Qualitative factors (factors that cannot be expressed in monetary terms) must also be
taken into account when making decisions. Which qualitative factors to list depend on
the question given? But examples include:
o Quality of service
o Sensitive information made available
o Decline in employee morale leading to redundancies.
P.5-6 Question 1
Special price decisions (based on other factors listed above – special orders):
1. Less than normal selling price (pricing decisions made outside the main market)
2. Very NB (will be in test)!! One can only accept a special order if there is spare
capacity (if it is not explicitly mentioned, it should be calculated whether spare
capacity does actually exist). There will always be enough information in the question
to calculate it.
