Identifying relevant and irrelevant cost
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Distinction Between Relevance and Cost Behavior:
Bron Co. makes and sells a single product. Bron incurred the following costs in its most recent fiscal year.
Materials Cost ($7 per unit) Sales Commission (2% of Sales)
Co. President's Salary Salaries of Admin. Personnel
Depreciation on Manufacturing Equip. Shipping & Handling ($0.25 per unit)
Customer Billing Costs (1% of Sales) Depreciation on Office Furniture
Rental Cost of Manufacturing Facility Manufacturing Supplies ($0.25 per unit)
Advertising Costs ($250,000 per yr.) Production Supervisor's Salary
Labor Cost ($5 per unit)
Bron could purchase the products that it currently makes. If it purchased the items, the co. would continue to sell them using its own logo, advertising program, and sales staff.
Identify each cost as relevant or irrelevant to the outsourcing decision and also indicate whether the cost is fixed or variable relative to the number of products manufactured and sold.
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Identifying relevant and irrelevant cost
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