"Only those costs that change need be included in the decision-making process." Evaluate this statement and discuss its merits or shortcomings based on your readings and review of the course content.

Answer

Decision making involves the choice between alternatives .Decision making involves two types of decisions i.e. long term decision and short term decision .The cost which is commonly used for decision making is the relevant cost or the costs that changes to the need is included in decision making process . In the decision making process we have to include the cost which changes according to the level of output. In this we have to consider the incremental cost which changes due to extra production.

Some of the merits of relevant cost are as follows;

1) These are the costs which are appropriate for specific management decision.

2) These costs are related to the future and different under alternative courses of action for a specific problem.

3) Only incremental cash flows form part of these costs.

4) It is easy to calculate and understand.

5) These costs are flexible in nature.

Shortcomings;

1) Differential cost includes an element of fixed cost if fixed cost changes due to decision but relevant cost don