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Direct costs and decision making.

Cost Accountant (Student) (92 Points)

05 December 2013

Hello,

I have a little confusion about direct costs .Are Direct Costs always relevant in decision making. Why and why not ? ?

Regards

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3 Replies

VIKASH KUMAR JAIN (Audit Executive) (711 Points)
Replied 05 December 2013

Always relevant for decision making, since it is directly related to product or service.Like material cost is always relevant, as it is directly related to product.However where these expenditure where already incurred,it can be considered as irrelevant for alternative proposal.

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Cost Accountant (Student) (92 Points)
Replied 06 December 2013

Thanks for your reply. Now see this question,
Which of the following statements is not true?
(a) Fixed costs are fixed over a range of activity (b) Variable costs are fixed per unit of production (c) Fixed cost per unit is variable with a change in the production level
(d) Direct costs are always relevant for decision
making .

Correct option given is(d). It says direct costs are not relevant. How??

VIKASH KUMAR JAIN (Audit Executive) (711 Points)
Replied 06 December 2013

Labours cost is direct cost, hence always relevant when paid on rate basis like rate per unit of production. but when labours are paid on monthly basis at fixed amount, it is irrelevant because, whatever be the production, company need to pay fixed amount.

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