Question

Explain the concepts of relevant costs and marginal costing which is very different from the way most health care costs are computed

Answer 1

Explain the concepts of relevant costs and marginal costing which is very different from the way most health care costs are computed.

The costs which should be used for decision making are often referred to as "relevant costs". CIMA defines relevant costs as 'costs appropriate to aiding the making of specific management decisions'.

To affect a decision a cost must be:

a) Future: Past expenses are unessential, as we can't influence them by current choices and they are normal to all options that we may pick.

b) Incremental: ' Meaning, use which will be acquired or stayed away from because of settling on a choice. Any costs which would be brought about regardless of whether the choice is made are not said to be incremental to the choice.

c) Cash stream: Expenses, for example, deterioration are not money streams and are subsequently not significant. Likewise, the book benefit of existing hardware is unessential, yet the transfer esteem is significant.

Different terms:

d) Common costs: Costs which will be indistinguishable for all options are unessential, e.g. lease or rates on a manufacturing plant would be brought about whatever items are created.

e) Sunk costs: Another name for past costs, which are constantly immaterial, e.g. devoted settled resources, improvement costs previously caused.

f) Committed costs: A future money outpouring that will be brought about in any case, whatever choice is taken now, e.g. contracts previously went into which can't be adjusted.

Relevant costs may also be expressed as opportunity costs. An opportunity cost is the benefit foregone by choosing one opportunity instead of the next best alternative.