The company selected for the study on relevant information for decision making is Electricity Storage Company. Electricity Storage Association is a global trade association established to foster improvement and commercialization of energy storage technologies. The main objective is to encourage the expansion and commercialization of competitive and dependable energy storage delivery system for use by electricity suppliers and their customers. (Technologies & applications, 2003).
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The activity and time used for the study
For the study on identification of relevant cost information for decision making, the financial statements of the company for the period 1st April 2000 to 31st March 2001 are considered.
The inputs used for the study
For the relevant cost information for the decision-making purpose in ESA Company, the previous financial report of the company is used. Information relating to relevant costs and irrelevant costs are considered for this decision-making purpose.
The company is planning to expand in their production operations by fully utilizing the production capacity of the company. For this purpose, they must invest on operating
The following Table presents the relevant and irrelevant information for decision making in the company
|Particulars||Amount in $|
|Relevant Cost information: |
Cost of the production operations
Irrelevant cost information:
1. Fixed cost
2. Sunk Cost
Relevant costs for the decision-making
According to CIMA relevant costs are “the costs appropriate to a specific management decision, i.e., ‘the amount by which costs increase and benefits decrease as a direct result of a specific management decision.” (Relevant cost for decision making, n.d)).
Two relevant costs for the decision making:
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- Cost of the production operations: The expansion in the production operations by fully utilizing the exiting capacity of the plant requires undertaking estimate on the operating cost requirements for the expansion program. Cost of the production operations: The operating cost requirements for the expanded production operations are estimated as $ 150000. It is relevant for the decision-making purpose as it directly influences the profitability of the expansion program.
- Labor cost: Labor cost is an important cost element in the operating cost of the company. For the expanded production operations higher labor cost is required and thus company must consider the labor cost requirements for the new expansion project
There are various costs that seem to be irrelevant for the decision-making purpose.
Two of them are discussed below
- Fixed overheads: For the expansion of the operations by utilizing the existing capacity of the company, fixed costs is irrelevant for the decision making as it does not influence the cost of expansion programmed. The fixed cost overheads should be incurred regardless of the expansion of the production operations.
- Past or sunk costs: Sunk costs are “Costs that have been created by a decision in the past and which cannot be changed by any decision that will be made in the future.” (Classification of cost for decision making, 2008).
Sunk costs are irrelevant for decision-making. These costs are already happened for the company and thus will not be influencing the future expansion programmed of the company. Sunk costs are not relevant because they can be avoided for taking decisions. Book values like sunk costs indicate the price paid for stock in the past and is not a relevant cost to the decision.
Implications from the results
The study on irrelevant and relevant cost information for the decision-making purpose reveals that not all cost elements in the operations are influencing the decision-making process.
In case of the ESA Company, the expansion program on production operations has not been influenced by the fixed cost and sunk cost elements. On the other hand the labor cost and operating cost have influence on the profitability of the expansion program and thus it is necessary to consider these two cost elements while taking expansion decisions.
- Classification of cost for decision making: Classification by relevant and irrelevant costs. (2008). Kaizenlog.
- Relevant cost for decision making: Relevant cost and decision making. (n.d).
- Technologies & applications: Technologies/ CAES. (2003). ESA: Electricity Storage Association.