The term "avoidable cost" refers to a company's opportunity cost associated with a particular decision. In other words, avoidable cost is the cost that could have been avoided if the company had chosen a different course of action.
There are two types of avoidable cost: sunk cost and variable cost. Sunk cost is a cost that cannot be recovered, such as the cost of buying a new piece of equipment. Variable cost is a cost that can be avoided, such as the cost of raw materials.
A company should only consider avoidable costs when making decisions. For example, if a company is considering whether to buy a new piece of equipment, it should only consider the cost of the equipment (sunk cost) and the cost of operating the equipment (variable cost). It should not consider the cost of the old equipment, which is a sunk cost.
What is difference between sunk cost and relevant cost?
The main difference between sunk costs and relevant costs is that sunk costs are costs that have already been incurred and cannot be recovered, while relevant costs are future costs that will be incurred regardless of the decision that is made.
Sunk costs are not relevant to the decision-making process because they cannot be changed. This is why sunk costs are also sometimes referred to as irrelevant costs. The only sunk cost that is relevant to the decision-making process is the opportunity cost, which is the cost of the best alternative that was not chosen.
Relevant costs are those costs that will be incurred regardless of the decision that is made. For example, if a company is considering whether to manufacture a product in-house or outsource it, the relevant costs would be the costs of materials, labor, and overhead. The sunk costs, such as the cost of the building and machinery, would not be relevant to the decision.
What is another name for a relevant cost quizlet?
There is no definitive answer to this question, as the term "relevant cost quizlet" could refer to any number of things related to corporate finance. However, some possible alternate names for a relevant cost quizlet could include a "cost-benefit analysis quizlet," a "marginal cost quizlet," or a "sunk cost quizlet."
Why relevant cost is also called avoidable cost? Relevant cost is also called avoidable cost because it is a cost that can be avoided by taking a particular course of action. For example, if a company is considering whether to make or buy a particular component, the relevant cost is the cost of making the component, minus the cost of buying it. If the company decides to make the component, the relevant cost is the cost of making it. If the company decides to buy the component, the relevant cost is the cost of buying it.
Are avoidable costs relevant in decision making?
Yes, avoidable costs are relevant in decision making because they are a sunk cost. A sunk cost is a cost that has already been incurred and cannot be recovered. Therefore, avoidable costs should be considered when making future decisions because they cannot be recovered.
What are the two types of relevant cost?
1. Sunk costs: A sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs are irrelevant to decision-making because they cannot be changed and do not affect future decisions.
2. Opportunity costs: An opportunity cost is the value of something that is given up in order to obtain something else. Opportunity costs are relevant to decision-making because they represent the best alternative use of resources.