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RELEVANT COSTS FOR DECISION MAKING

I. Questions

1. Quantitative factors are those which may more easily be reduced in terms of pesos such as projected costs of materials, labor and overhead. Qualitative factors are those whose measurement in pesos is difficult and imprecise; yet a qualitative factor may be easily given more weight than the measurable cost savings. It can be seen that the accountant’s role in making decisions deals with the quantitative factors.

2. Relevant costs are expected future costs that will differ between alternatives. In view of the definition of relevant costs, historical costs are always irrelevant because they are not future costs. They may be helpful in predicting relevant costs but they are always irrelevant costs per se.

3. The differential costs in any given situation is commonly defined as the change in total cost under each alternative. It is not relevant cost, but it is the algebraic difference between the relevant costs for the alternatives under consideration.

4. Analysis:

|Future costs: |Replace |Rebuild |

| New Truck |P10,200 | |

| Less: Proceeds from | | |

| disposal, net | 1,000 | |

| |P 9,200 |P8,500 |

|Advantage of rebuilding |P700 |

The original cost of the old truck is irrelevant but its disposal value is relevant. It is recommended that the truck should be rebuilt because it will involve lesser cash outlay.…...

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