Cost Accounting Foundations and Evolutions

Question: Measuring relevant costs and revenues while taking decision on replacement of equipment and outsourcing of work is important. Discuss the same. Answer: What is relevant cost and how is it directly proportionate to the revenues is what all organizations focus at while taking crucial financial decisions. Relevant cost basically points at the amount of cash outflow that will take place to generate the adequate amount of revenue. There are various situations where costs are to be incurred so as to be able to derive forecasted revenues. Two decision making situations such as decision on replacement of an equipment and outsourcing decisions requires detailed brainstorming in relation to the relevant costs to be incurred and how much revenues will such a decision generate. Replacing an equipment is a strategic decision which any organization takes as it effects its ongoing process of manufacture and also replacing a fixed asset involves huge costs of purchase, installation and implementation. These costs have to be incurred after due analysis of the amount of revenues it will generate and how would it help to increase the productivity of the concern by reducing the cost of production. The main aim for replacement of any equipment is basically to ensure that the cost of production reduces significantly so that profits increases and the quality of production can also improve. Further the present machine which is to be replaced also is of significant value (Hafeezm, 2012). The cost that would be incurred in maintaining it if is more than the revenues that the firm generates then the same should be replaced and the cost incurred is considered to be relevant in nature. Further such a cost is considered to e relevant as in this competitive world new methodol ogies of production are always given priority and customers are more attracted towards such organizations who are better equipped and always updated with the latest technology. Also equipments after working for its estimated life will not yield much replacement value. Thus such losses are avoided by selling those old equipments well on time so as to be able to get better resale value of the equipments. Thus decision with regards replacement of an equipment requires the organizations to have a thorough analysis of how would such a replacement affect its costs and revenues. How would it help to increase the productivity of the concern and also increase revenues by adding more customers, reducing the cost of production thus increasing profits and market share simultaneously. Better branding is also possible if the production process is modernized and well equipped. (Drury 2008) Another very important decision that affects the cost-revenue model for any concern is the make or buy decision. This is one such area which requires brain racking at a micro level. The costs to be incurred while producing a product indigenously or buying it from other manufacturers is a crucial decision as the revenue generation will vary depending upon the decision taken. Its not possible for any organization to produce all its raw materials internally and so they will have to outsource some part of it (Kinney, Raiborn, 2009). If producing a product would cost virtually the same if produced within the organization then it is always better to outsource the product so that the organization can then focus on producing or generating those products which are design specific and cannot be outsourced. Such type of cost is relevant as it helps to reduce the burden of the organization to a great extent. The top management can then deploy there human capital somewhere else and derive maximu m revenues from the costs they have incurred(Boyd, 2015). Further if a comparative analysis is done for producing or outsourcing of a product which can be outsourced easily, one will notice that then the costs incurred for its production is irrelevant and avoidable. The company can negotiate better with the outsourcing agencies and save on time as well as human capital costs. Further the revenues will be generated faster also as the other company is required to supply goods on time and if not the company is liable to claim compensation also which it would not be able to do in case of in house production. Further if in future the said product is not required it can easily stop the purchase from the market but the same would not be possible in case of in house production (Simplestudies.com, 2015). Thus a decision regarding incurring of the costs with regards procurement of goods should be taken only after a detailed cost analysis is done between buy versus make costs. As these would affect the revenues also. The costs are relevant only if it enables to generate adequate amount of revenues as desired. Therefore what cost is relevant and how much revenue would it help to generate is a decision to be taken after considering all the pros and cons. Replacement of an equipment should be done taking into consideration the replacement costs, the technological advancements and how would it enable to increase the revenues of the organization. Thus all decisions come with their own pros and cons which should be studied in detail and weighed accordingly before arriving at a decision. References: Boyd, K., 2015, To Outsource or Not to Outsource : a Cost Accounting Decision, Cost accounting for Dummies, viewed on 19th July 2016, https://www.dummies.com/how-to/content/to-outsource-or-not-to-outsource-a-cost-accounting.html Drury, C., 2008, Management and cost accounting, Pat Bond: Italy Simplestudies.com, 2015, Make or Buy Decisions, viewed on 19th July 2016, https://simplestudies.com/make-or-buy-decisions.html Hafeezm, 2012, Managerial Accounting Decision Making : Relevant Costs and Benefits , viewed on 19th July 2016, https://hubpages.com/education/Managerial-Accounting-Decision-Making-Relevant-Costs-Benefits Kinney, M.R., Raiborn, C.A., 2009, Cost Accounting : Foundations and Evolutions, Thomson: Sputh Western