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Classification costs for management decisions

Financial management

Relevant and irrelevant costs.
The relevant costs are those that change as a result of the decision, irrelevant and, consequently, costs that are independent of management decision.
To irrelevant costs include:
• expenses that have occurred in the past. So, if we consider the possibility of replacing old equipment to new, the cost of the old equipment is not relevant, since funds for its acquisition have been used before;
• the costs are the same for all alternative options for implementing the financial decisions. Thus, when the expediency of purchase or lease personal computer, PC acquisition costs and the rent will be relevant, and the cost of software - irrelevant, since it is the same for both alternatives solutions.
Costs that make the difference between alternative solutions in financial management practice called differential.
Fixed and variable costs.
Variable call costs that vary directly with the volume of production. That total variable costs are linear, depending on production volume, and variable costs per unit of output is constant value.
Fixed costs remain the same for different production volumes for a specific period. That is, under certain conditions, economic activity total fixed costs do not change and constant unit costs decrease with the increase in production. Note that the total fixed costs may vary under the influence of external factors (eg, prices), and also when further growth in output is not possible with the resources available (material, labor, financial). Because fixed costs can be considered only within the same range of activities relevant to a particular period of time.
Based on the fixed and variable costs is justified by the necessary amount of profit, production, prices, decisions on the form of wages, the appropriateness of the purchase of additional equipment to increase production and so on. More study method of financial decisions using the classification of expenses for variables and constants discussed in the following sections.
Actual and potential costs.
Actual costs - these are costs that require the payment of money or other assets used and reflected in accounting documents as they arise.
Possible (alternative or conventional) costs - lost profit when the company, taking a one alternative actions rejects other financial decisions due to limited resources. Limited resources are a major cause of possible (alternative) costs, since the sufficient material, labor and financial resources do not need to sacrifice something and give up goals.
Possible costs occur when the order to perform favorable for the production of one type of product is necessary to reduce the production of other profitable products or when in connection with production needs distracted turnover funds, which could bring additional income subject to hotel bank deposits, securities, long-term investment projects. Such examples are many. Therefore justifying any financial decision, you need to analyze in detail whether it causes potential costs of non-use alternatives. There are costs attached to the actual costs associated with implementing the options.
During incremental (incremental) understand the additional costs and income for all additional output. At the same fixed costs as may be included and not included in the amount of incremental costs. So, if fixed costs are changing as a result of a decision, they increase relates to incremental costs. And when fixed costs do not change as a result of the decision, incremental costs will be. For example, when a decision on increasing sales, incremental will be additional labor costs of sales, advertising costs on business trips, but will not change depreciation, maintenance costs for marketing, to pay the rent (in case of lease ).
Margin (marginal) - is the cost of production or sale of each additional unit. Economists, considering the relationship between costs, revenues and production volumes are typically used category of marginal costs and revenues as a result of increased production per unit of output. Accountants are more interested in the analysis of incremental costs and revenues as a result of an overall increase in production and sales.