Relevant cost information for order acceptance decisions

Abstract

Some economic considerations for order acceptance decisions are discussed. The relevant economic considerations for order acceptance are widely discussed in the literature: only those costs are relevant which would be avoidable by not accepting the order incremental costs plus opportunity costs . Many costs are unavoidable in single-order acceptance decisions since often the long-term investment decisions have already been made, employees have been appointed, long-term contracts with suppliers have been signed, etc. It is, however, still difficult to apply the concept of relevant costs to practical order acceptance decisions. Some suggestions are made for improving the usefulness of the relevant cost approach. The production planning and control function can provide some of the information that is required for calculating the relevant costs involved in a particular order acceptance decision. This information concerns capacity cost behaviour to calculate incremental costs and planned capacity utilization to calculate opportunity costs . Furthermore, the production planning and control function can provide information that enables an assessment of the reliability of such calculations. This is information on planned versus actual capacity utilization, planned versus actual cost behaviour and on the variation of contribution margins.