The organizations strive to earn short-run profits.  In making short-run decisions, not all cost and revenue data is relevant.  The cost data relevant for decision-making is referred to as relevant costs and that which is not useful for decision-making is non-relevant  costs.
On the revenue side, the only relevant revenue is the incremental & differential revenue.

Relevant and Non-Relevant Costs:
1.Future Costs and Sunk Costs (IR): A future Cost is that cost yet to be incurred and since the decision is in the future, future costs are relevant.

A sunk cost is a historical cost which has already been incurred and cannot be reversed hence irrelevant for decision-making.

2.Incremental Costs and
The sales department has found another company willing to buy the machine for £34,000 once it has been completed.

To complete the work, the following costs will be incurred:-
(a)Materials:  These have been bought at cost of 60,000.  They have no other use and if the machine is not completed, they will be sold for scrap at £2,000.

(b)Further labour costs would be £8,000.  Labour is in short supply and if the machine is not complete, the workforce would be switched to another job and would earn £30,000 in revenue and incur £12,000 and absorb fixed overheads of £8,000.

   c) Consultancy Fees £4,000: If the work is not completed, the consultancy will be cancelled at a cost of £1,500.

   d) General overheads of 8,000 would be added to cost of additional work.

Required:
Assess whether the new customer’s offer should be accepted clearly bringing out the reasons for inclusion or exclusion of any costs.

Answer rating: 100% (QA)

To assess whether the new customers offer should be accepted we need to determine the relevant costs ... View the full answer