1. Cost Accounting & Management Accounting
Decision Making
Lecture-42
Main Ahmad Farhan

2. Avoidable Cost
This terminology is used where the decision is to be taken to discontinue a product.
Avoidable costs are costs which would not be incurred if the activity to which they relate did not existing.

3. Unavoidable Cost
Cost which would be incurred whether or not the product is discontinued are known as unavoidable cost.

4. Controllable cost
Controllable cost are items of expenditure which can be directly influenced by a given manager within a given time span.

5. Discretionary fixed cost Advertising and Research & development.
Committed fixed cost
Depreciation and rent relating to property, plant and equipment
Discretionary fixed cost
Advertising and Research & development.

6. Differential Cost It can be incremental cost and avoidable Cost.
It is a difference because of increase in activity level
Avoidable cost
It is a difference because of decrease in activity level

7. Example
If X product costs Rs 700 replaced with Y product costs Rs 800, the differential cost will be Rs 100
If X product costs Rs 1,200 replaced with Y product costs Rs 1000 the avoidable cost will be Rs 200

8. Opportunity Cost
An opportunity cost is the value of the benefit scarified when one decision is taken in preference to an alternative decision.
x y z
Contribution Margin , s

9. Sunk Cost
Sunk cost, which have been charged already as a cost of production.
A sunk cost is a past cost which is not directly relevant in decision making.

10. Fixed & Variable cost Fixed cost Irrelevant cost
Variable cost Irrelevant cost

11. Relevant to decision making
First Specific
Second General Fixed over,,,,,
Third Relevant to decision making appears and than hide
Fourth Irrelevant to decision making appears and than hide
Fifth incremental cost
Sixth Avoidable cost
Relevant to decision making
Avoidable cost
Incremental cost

12. Incremental Cost Avoidable Cost
It increases with an increase in activity level.
Avoidable Cost
This cost will decrease or entirely eliminate if a product drops or activity level reduce or shut down the operations.