RELEVANT COSTING:POSITIVE AND NEGATIVE IMPACTS ON BUSINESS

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11 Feb 2023
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Relevant costing is a cost accounting method that focuses on the costs relevant to a specific decision, rather than considering all the costs involved in a situation. The idea behind relevant costing is to identify the costs and benefits that will change as a result of a decision and to exclude those that will not change. This allows for a more accurate assessment of the costs and benefits of a decision and can lead to better decision-making.

Relevant costs are those costs that will be incurred or saved as a result of a decision and are used to predict future cash flows. These costs can be either incremental or sunk costs. Incremental costs are those that will change as a result of a decision and can be considered in the decision-making process. Sunk costs, on the other hand, are costs that have already been incurred and cannot be changed, and therefore should not be considered in the decision-making process.

Relevant costing is often used in situations where a company is considering whether to keep or discontinue a product line, make or buy a component, or accept or reject a special order. In these situations, only the relevant costs and benefits are considered to make the decision, as this will provide a clearer picture of the financial impact of the decision.

POSITIVE IMPACTS OF RELEVANT COSTING ON BUSINESS

1. Relevant costing can have a significant impact on a business by improving the quality of its decision-making. By focusing on the costs and benefits that are relevant to a specific decision, rather than considering all the costs involved, relevant costing provides a clearer picture of the financial impact of a decision. This leads to better informed decisions that can improve the bottom line of a business.

2. One of the key benefits of relevant costing is that it helps to eliminate the sunk costs bias. Sunk costs are costs that have already been incurred and cannot be changed. When decision-makers consider sunk costs, they can be biased towards maintaining the status quo, even if it is not the best decision for the business. Relevant costing, by focusing on the incremental costs and benefits of a decision, helps to eliminate this bias and allows for a more objective evaluation of the financial impact of a decision.

3. Relevant costing also helps to reduce the risk of bad decisions. By focusing on the costs and benefits that are relevant to a decision, relevant costing can provide a more accurate assessment of the financial impact of a decision. This can help to avoid decisions that appear to be profitable on the surface but may actually lead to long-term losses.
Relevant costing can also improve the overall efficiency of a business. By focusing on the costs and benefits that are relevant to a decision, relevant costing can help to identify areas where resources can be allocated more efficiently. This can lead to cost savings and improved profitability.

NEGATIVE IMPACTS OF RELEVANT COSTING ON BUSINESS

While relevant costing can have many positive impacts on a business, there are some potential negative impacts as well.
1. One of the main limitations of relevant costing is that it can be time-consuming and difficult to apply. Identifying the relevant costs and benefits of a decision requires a thorough understanding of the costs involved and the potential consequences of a decision. This can be challenging and may require significant effort and resources.

2. Another potential negative impact of relevant costing is that it can lead to suboptimal decision-making. By focusing only on the costs and benefits that are relevant to a decision, relevant costing may lead to decisions that are financially sound but do not consider other important factors such as customer satisfaction, employee morale, and the long-term effects on the business.
3. Relevant costing can also lead to a short-term focus. By focusing only on the incremental costs and benefits of a decision, relevant costing can lead to decisions that are profitable in the short term but may have negative long-term consequences.
Finally, relevant costing can also lead to disputes and disagreements among decision-makers. This is because different decision-makers may have different interpretations of what is relevant, leading to conflicting opinions and decisions.

In conclusion, relevant costing is a useful tool for decision-making as it helps to identify the costs and benefits that will change as a result of a decision, and to exclude those that will not change. This leads to a more accurate assessment of the costs and benefits of a decision, which can lead to better decision-making. Relevant costing can have a significant impact on a business by improving the quality of its decision-making, reducing the risk of bad decisions, and improving the overall efficiency of the business. Relevant costing provides a clearer picture of the financial impact of a decision, which can lead to better informed and more profitable decisions. while relevant costing can have many positive impacts on a business, it also has some potential negative impacts, decision-makers.

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