Post replies on the posts of other classmates that add something to the discussion utilizing concepts from the case, course, and ethical principles. You should not merely compliment classmates or post your feelings about their post but support your response with concepts from the assigned material for the course. See attached pdf. Same topic you did this week.
Statement1:
This module discusses using costs in decision making as well as accumulating and assigning
costs. Discuss all of the following:
Different managerial uses of cost information
The meanings and decision making uses of sunk costs, opportunity costs,
avoidable costs and relevant costs
Experiences you have with these costs, whether it be in your daily personal life or
in your professional life
While going through this module there were many occasions where I paused for a
moment and tried to consider how I could use this information in my day to day from a
managerial standpoint. I currently am a project manager for a telecommunications
company and assist with managing the construction to install internet/cable wiring in
homes and apartment complexes across my region. I am constantly analyzing the costs
of projects, which include installation, labor, time variables (different areas have different
landscapes/needs), materials, and a lot of other things to create a scope of work for each
project. I use this information to help identify what a good or bad bid would be for
projects. I also use this information to help identify if there is a net profit on our time
spent for these projects. From a labor standpoint, I’m also using this cost information to
approximate how many people are needed for certain jobs and what the timeframes are
for completion.
Sunk costs are costs that results from a previous commitment and cannot be changed or
recovered (these should not be included when weighing new decisions). I recently had an
example of this within my development projects recently where we had 2 extremely
similar apartment complexes right next to each other on the same street. We had a
contract on one and not the other, so we began doing work and installed all our services
in the building. We found out later that our team accidentally did all the
work/installation on the wrong building when we did not have a contract negotiated yet.
Our team needed to meet to determine next steps, costs, and if it is worth it for our
company to remove all the lines or keep them there in the hopes that we could secure
something. This was a very expensive decision but when weighing this we removed the
sunk costs from the assessment. These included the materials, supplies, and labor used
to install everything in the wrong building.
Opportunity costs are the maximum value forgone when a course of action is chosen. I
also come across this in my field when we have multiple developers (customers) looking
for our team to install/build in their apartments. Often, we must decide which work we
want to commence and need to give up the other opportunities due to time constraints
and labor. Let’s assume my team receives 3 projects with an estimated return of 500k,
300k, and 400k. Due to location and time we choose the 400k option and forgo the
other 2. The opportunity cost of this example would be 500k.
Avoidable costs are costs that can be avoided by taking a specific course of action. In my
line of work, we have lots of different suppliers that offer tons of different products,
materials, and delivery options for their services. Sometimes we need to examine the
cost to produce our own coax cables or to purchase from a business partner. If we
produce on our own, we could have direct material costs, direct labor, variable overhead,
and avoidable fixed costs. If we choose to just buy these from a business partner those
would all be examples of avoidable costs.
Relevant costs are costs that will change because of a decision. I have a personal
example of this that happened last year. I purchased an early all-day ski pass ticket for
around $80 in advance of a trip I was taking. On the day of the trip, it was a beautiful
sunny day and the majority of ski slopes were closed down due to the warm weather. If I
decided to still go on the trip (which I did do) the estimated costs were $100 for
equipment rental, $20 or so for gas, and another $50 for food, which adds up to $170.
These would all be examples of relevant costs and the previous $80 I spent on the all-
day pass is a sunk cost since it could not be changed.
Statement2:
1. Different managerial uses of cost information
Managerial use of cost information is there to facilitate the decision-making
process and to find the best resulting solution for the company. The different
cost information allows a company to make a good decision, for example, how
do they renew the machine or do they have the product manufactured
somewhere else to work even more cost-efficiently. The different cost
information helps the company to make a well-informed decision and is
therefore essential for company success.
2. The meanings and decision-making uses of sunk costs, opportunity costs,
avoidable costs and relevant costs
Sunk costs: Sunk costs refer to costs already incurred that can no longer be
reversed and should not be taken into account in an upcoming decision, on
whether to continue a project.
Opportunity costs: In simple terms, opportunity costs are the lost benefits of
an alternative action that is not chosen or cannot be realized. So, you give up a
possibility (opportunity). Therefore, opportunity costs are sometimes also
called foregone costs or alternative costs. However, despite their name, they
are not real costs. They are not taken into account in cost and activity
accounting, as they are only used to quantify foregone alternatives. Overall it
can be important in your decision making process.
Relevant costs: The relevant costs are costs that are relevant to the decision.
Relevant costs are costs that arise in the course of a realized alternative
course of action. Relevant costs cannot be defined in absolute terms, as they
are determined by the context in which the decision is made.
Avoidable costs: are costs that can be avoided by making a specific decision.
3. Experiences you have with these costs, whether it be in your daily personal life or
in your professional life
Sunk costs: An example of sunk cost in my personal life would be that I have
purchased a show which has 6 seasons and I find the show not good anymore
after watching 4 seasons. In that case, the purchase was made, and it cannot
be changed. If I keep watching even though I don’t like it anymore just
because I made that purchase is not a good solution for me because I could
spend that time more productively because the money is gone anyways.
Opportunity costs: An example in my personal life would be first: I am invited
to dinner at my grandparent’s and second: I am invited to a house party. If I
decide to go to the house party my opportunity costs are the free meal that I
would have gotten and some pocket money that I always get when I visit my
grandparents.
Relevant costs: An example of my personal life is that I once had the
opportunity to go on a trip by train where the ticket would be paid for or by
car where I could use the car for free, but I had to pay for gas. I decided the go
by car because I would be more flexible, so my relevant costs are the costs I
have to take now after deciding to go by car and not the train.
Avoidable costs: In that case, I would go back to my previous example of
relevant costs. I could have avoided the costs of putting gas in the car by just
deciding to go by train.
Statement3:
Managers use cost information to drive business forward. In an ideal situation the
decisions they make are cost effective/revenue generating. However, that may not
always be the case. Sometimes managers have to use cost information to cut losses,
pursue better opportunities, or even move forward from poor decisions.
Sunk costs can be described as money already spent that cannot be recovered or
recuperated. At my organization, they invested in an HR information system that was
supposed to make the day to day functions operate smoothly and connect seamlessly to
one another. After two years of using the product (at a cost of about $100K per year)
they decided this was not, in fact, a worthwhile system to use. We cannot get a refund
on what was already spent on the system. However, we have decided to go with another
system that actually has what we need in order to operate successfully and serve our
employees better. The money already spent in the failed system is a sunk cost. No
matter what system we move to, that money for the old system is gone. However, in
order to save face with the board, our CEO has approved the implementation of a new
system while we are still under contract with the old one.
Opportunity costs are what you are giving up when you decide to do something else: i.e.
you cannot do both things at the same time. Organizations have to decide what they are
going to do/produce and for what amount of time. If they decide to do “A” they are
giving up the opportunity to do “B”. Opportunity costs help managers decide which
course of action will produce the best outcome.
Avoidable costs are costs that you avoid incurring by taking actions to prevent the cost.
If employees are laid-off from work, the employer has avoided the cost of benefits and
pay.
Conversely, relevant costs are related to the decisions you make and what changes your
costs see. When I took my son to Disney World this summer, I already paid for the
admission tickets (sunk costs). However, we had lunch, Mickey Mouse ice cream,
purchase souvenirs, mouse ears, etc. Overall, I had significant relevant costs related to
how we chose to spend our day at the amusement park. The additional money spent,
outside of the tickets, is considered a relevant cost.
After reading chapter 3, I realized how often I unknowingly made decisions using cost
information. A recurring example in the text and lecture is the decision to go to college. I
have 15 years of experience in my field (HR) but I didn’t have my degree. I decided to
pursue my degree in order to learn higher level management skills that would help me
qualify for a higher ranking position (hopefully). I debated whether to attend classes in
person or online. It was more cost effective to attend online in order to reduce the costs
of commuting (tolls and gas). The tuition was also less expensive when looking at online
classes in comparison to other schools. My hope is that, by investing time and money in
obtaining a graduate degree, I’ll make up for the time and money spent by receiving an
increase in compensation in the future.
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