Management Accounting Report: Relevant Costs Analysis

This report provides an analysis of relevant costs in the context of management accounting. It examines various types of costs, including sunk costs, depreciation, and capital expenditures, and their relevance in decision-making processes. The report uses the example of Mega Saver Airways to illustrate the application of these concepts. It differentiates between relevant and irrelevant costs, explaining how each impacts financial analysis and business decisions. The analysis covers the implications of annual rent costs, equipment purchases, and managerial salaries, emphasizing their significance in evaluating project feasibility and making informed financial choices. The report also highlights the importance of understanding non-cash expenses like depreciation and their treatment in cost analysis.

RUNNING HEAD: MANAGEMENT ACCOUNTING
MANAGEMENT ACCOUNTING

MANAGEMENT ACCOUNTING 1
Relevant costs are those costs which are relevant in the decision making process. In
other terms, any costs which shall be incurred in one alternative and ignored in other
alternative.
Thus, below are some expenditures which are incurred by Mega Saver Airways.
1. £ 2000, 000 is spent on the evaluation of feasibility report.
Feasibility study is conducted during the deliberation phase of the project which
determines whether the project or the business is feasible or not because this study
will help in safeguarding against the wastage of investment.
Therefore, this amount is sunk cost which is considered as irrelevant expense for the
Mega Saver Airways because it is spent before the commencement of the business
and does not affect the future cash flows of the business and thus do not relevant to
the current decision.
2. £ 300, 000 per annum is the annual rent costs of the new headquarter.
Rental costs which shall be incurred for the particular project is considered to be the
relevant for the decision making purpose.
Therefore, the amount of £ 300, 000 per annum is considered to be relevant expense
for the Mega Saver Airways because it will be charged annually for the new
headquarter.
3. £ 1, 500,000 is spent for the purchase of new equipment.
Any capital expenditure (such as purchase of fixed assets) incurred for the specific
requirement or for the specific project or business, then it shall be treated as relevant
expense for the decision making process.

MANAGEMENT ACCOUNTING 2
Therefore, the purchase of new equipment of £ 1, 500,000 is capital in nature and it is
considered as relevant cost for the Mega Saver Airways because the new equipment is
purchased for the specific project.
4. Depreciation on the above machinery.
Depreciation is non-cash expense and no real cash outflows are involved and it is
considered to be irrelevant cost for the Mega Saver Airways.
5. Manager’s salary of £ 100, 000
Salaries which can be laid off is relevant because the cost shall continue to incur if the
project exists but shall not continue to incurred when the project is disposed of.
Thus, in this case manager’s salary of £ 100, 000 is particularly payable for the new
budget airways which signifies that this expense is relevant cost for the Mega Saver
Airways and also relevant for the current decision.