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(Drury) Measuring Relevant Costs and Revenues for Decision-Making

5 important questions on (Drury) Measuring Relevant Costs and Revenues for Decision-Making

When are activities discontinued?

When in the periodic profitability analysis an unprofitable activity is found. A more detailed appraisal is required to ascertain whether or not they should be discontinued.

Why are materials taken form existing inventory irrelevant?

Because the original purchase price a past or sunk cost represents.

Consider the situation where the materials have no further use apart from being used on a particular activity. When are materials with a realizable value relevant?

When the use of the materials will result in lost sales revenues, and this lost sales revenue will represent an opportunity cost that must be assigned tot he activity.
They are irrelevant if the materials have no realizable value.

When are direct labor costs irrelevant?

For short-term decision-making purposes.
Where a company has temporary spare capacity and the labor force is to be maintained in the short term, the direct labor cost incurred will remain the same for all alternative decisions.

When are direct labor costs relevant?

In a situation where casual labor is used and where workers can be hired on a daily basis; a company may then adjust the employment of labor to exactly the amount required to meet the production requirements.
The labor cost will increase if the company accepts additional work, and will decrease if production is reduced.

The question on the page originate from the summary of the following study material:

Drury Managerial Finance | 9781473734760 | Eugene F Brigham, et al

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