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David Collison & Massimo Contrafatto DEFINITIONS Relevant costs - - PowerPoint PPT Presentation
David Collison & Massimo Contrafatto DEFINITIONS Relevant costs - - PowerPoint PPT Presentation
David Collison & Massimo Contrafatto DEFINITIONS Relevant costs and revenues are those future costs and Relevant costs and revenues revenues that will be changed by a decision, whereas irrelevant costs and revenues are those that will not be
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THE CASE STUDY
Data: Data:
A) Company: A) Company: J B Development and Construction Ltd; B) Sector: B) Sector: Construction (Building private houses) C) Decision between two projects C) Decision between two projects: Northfield (N) and Southfield (S); D) Acquisition D) Acquisition: - N was bought in 1987 for £220,000 (CV: £150,000)
- S was bought in 1991 for £160,000 (CV: £170,000);
E)Landscaping improvements E)Landscaping improvements: S would require £40,000 F) Financial information available: F) Financial information available: see table below Now one project must be cancelled? Which one? Which costs and revenues are relevant?
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BUDGETED FINANCIAL INFORMATION
NORTHFIELD SOUTHFIELD
SALES REVENUES
1050 1200
LAND
120 160
MATERIALS
250
- 50 bought (40 re-usable)
- 10 saleable (5)
325
- 100 (20 re-usable)
- 80 saleable (20)
LABOUR
100 100
MACHINE PROCESS
25
- 25 (500 hr*50)
40
- 40 (800 hr*50)
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FINANCIAL INFORMATION AVAILABLE
NORTHFIELD SOUTHFIELD
CONSULTANCY FEE
70
- 10 £
- 5 cancellation fee
100
- 70 £
- 10 cancellation fee
PLANT HIRE
40 65
CENTRAL FIXED OVERHEAD APPORT.
50 60
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IRRELEVANT INFORMATION
The irrelevant information (excluded from decision The irrelevant information (excluded from decision-
- making):
making):
A) Cost of acquisition land A) Cost of acquisition land; B) Materials: B) Materials: those which cannot use elsewhere and not re-saleable; C) Machine processing: C) Machine processing: allocated costs; D) Consultancy D) Consultancy: money already spent on consultancy which has been provided. All this information is irrelevant and thus will be excluded fro All this information is irrelevant and thus will be excluded from m decision decision-
- making process.
making process.
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RELEVANT INFORMATION (INFLOWS)
NORTHFIELD SOUTHFIELD
HOUSES SALES
1050 1200
SALE OF UNUSED LAND
170 150
SALE OF STOCK
20 5
SAVINGS FROM USE OF STOCK
20 40
TOTALE (A) =1260 =1260 = 1395 = 1395
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RELEVANT INFORMATION (OUTFLOWS)
NORTHFIELD SOUTHFIELD
LANDSCAPING
40
CONSULTANCY
60 30
CANCELLATION FEE
10 5
MATERIAL
200 225
LABOUR
100 100
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RELEVANT INFORMATION (OUTFLOWS)
NORTHFIELD SOUTHFIELD
PROCESSING HOURS
400*80 + 100*100 =42 400*80+400*100 = 72
PLANT HIRE
40 65
Total (B) 452 537 A- B 1260-452= 808 808 1395-537=858 858
Southfield better by Southfield better by £ £50,000 50,000
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DECISION ON OPPORTNITY COST
An opportunity cost An opportunity cost is a cost that measures the opportunity that is lost or sacrificed when the choice of one course of action requires that an alternative course of action is given up (Drury,
p.39)
NORTHFIELD SOUTHFIELD
HOUSES SALES (A)
1050 1200
OUTFLOWS
452 537
OPP.COST LAND
150 170
- OPP. COST OF MAT’L
45 40
TOTAL OUTFLOWS (B)
452+195= 647 537+210= 747
A A -
- B
B
1050-647= 403 1200- 747= 453
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RELEVANT INFORMATION: QUESTION B
NORTH SOUTH NEITHER
HOUSES SALES
1050 1200
- SALE OF
UNUSED LAND
170 150 320
SALE OF STOCK
20 5 25
SAVINGS FROM USE OF STOCK
20 40 6
TOTALE (A) =1260 =1260 = 1395 = 1395 = 405 = 405
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RELEVANT INFORMATION: QUESTION B
NORTH SOUTH NEITHER
OUTFLOWS
452 537
- CANCELLATION
FEES FOR BOTH
15 TOTAL (B)
452 452 537 537 15 15
A- B
808 808 858 858 390 390
S leaves the firm 858 S leaves the firm 858-
- 390= 468 better off than it would