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Relevant Information (Decision-Making) - Coggle Diagram
Relevant Information (Decision-Making)
Core definitions (these are examinable)
Relevant cost/benefit
: differs between alternatives and is future-focused.
Incremental/differential cost
: the change in total cost between options (basis of relevant costing).
Avoidable cost
: eliminated (wholly/partly) by choosing one alternative → relevant.
Unavoidable cost
: will happen anyway → irrelevant.
Sunk cost
: already incurred, not reversible → irrelevant.
Opportunity cost
: benefit foregone by choosing one option over another → relevant (often missed in exams).
Make-or-buy (how to write the theory)
Compare avoidable internal costs vs purchase price.
Watch for
: depreciation (often sunk), supervisor salaries (may be unavoidable), spare capacity effects.
Mention qualitative factors
: quality control, supplier reliability, confidentiality, workforce morale.
Special order pricing (typical theory points)
If spare capacity exists, many fixed costs are not incremental; decision based mainly on incremental variable costs + any extra fixed costs.
If overtime/additional resources required, labour becomes incremental.
Dropping a product line / closing segment
Compare contribution lost vs avoidable fixed costs saved.
Include qualitative issues
: customer relationships, complementarity, brand, knock-on sales.
Quantitative vs qualitative factors
Quantitative
: measurable € effects (incremental costs/revenues).
Qualitative
: non-€ issues (quality, reputation, employee impact, strategic fit).