Is depreciation a relevant or irrelevant cost?
Non-cash items, such as depreciation and amortization, are frequently categorized as irrelevant costs for most types of management decisions, since they do not impact cash flows.
Depreciation – this is not a relevant cost as it is not a cash flow. Sale proceeds – this is a relevant cost as it is a cash inflow which will occur in 10 years as a result of the decision to invest. Annual insurance cost – this is a relevant cost as this is an additional fixed cost caused by the decision to invest.
Any costs which would be incurred whether or not the decision is made are not said to be incremental to the decision. c) Cash flow: Expenses such as depreciation are not cash flows and are therefore not relevant. Similarly, the book value of existing equipment is irrelevant, but the disposal value is relevant.
Relevant costs are costs that will be affected by a managerial decision. Irrelevant costs are those that will not change in the future when you make one decision versus another. Examples of irrelevant costs are sunk costs, committed costs, or overheads as these cannot be avoided.
Future costs, which cannot be altered, are not relevant as they will have to be incurred irrespective of the decision made. Non-cash expenses like depreciation are not relevant as they do not affect the cash flows of a firm.
The correct answer is c: replacement cost.
Depreciation cost on equipment is irrelevant in decision making because depreciation on equipment that has already been purchased is a past cost.
Fixed costs, such as a factory lease or manager salaries, are irrelevant because the firm has already paid for those costs with prior sales.
Differential, avoidable, and opportunity costs are considered relevant costs. Sunk and fixed overhead costs are irrelevant. Using examples to demonstrate these costs show us that which costs are included in what places depend on what decision is made and the specific situation.
Terms in this set (50) A cost that can be avoided by choosing one alternative over another is relevant for decision purposes. Sunk costs are never relevant in decision making. Future costs that do not differ between the alternatives in a decision are avoidable costs.
Are fixed costs relevant or irrelevant?
Fixed costs can be relevant but they have to be related to a specific decision. On the other hand, fixed costs that are general in nature (i.e. fixed costs that we incur regardless of whichever decision is made), would not be considered relevant.
Irrelevant means not related to the subject at hand. If a rock star becomes irrelevant, it means people are not relating––or even listening––to his music anymore. It isn't part of what people are thinking or talking about. The opposite is relevant, meaning related.
Which of the following is TRUE about irrelevant costs? They will never be relevant.
Depreciation is one common fixed cost that is recorded as an indirect expense. Companies create a depreciation expense schedule for asset investments with values falling over time. For example, a company might buy machinery for a manufacturing assembly line that is expensed over time using depreciation.
Depreciation is a fixed cost, because it recurs in the same amount per period throughout the useful life of an asset. Depreciation cannot be considered a variable cost, since it does not vary with activity volume.
Depreciation is considered to be an expense for accounting purposes, as it results in a cost of doing business. As assets like machines are used, they experience wear and tear and decline in value over their useful lives. Depreciation is recorded as an expense on the income statement.
Examples of product costs are direct materials, direct labor, and allocated factory overhead. Examples of period costs are general and administrative expenses, such as rent, office depreciation, office supplies, and utilities.
Usually manufacturing overhead costs include depreciation of equipment, salary and wages paid to factory personnel and electricity used to operate the equipment.
