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Time Orientation of Costs

Accounting (Year 12) - Cost Accounting

Christian Bien

What are time orientation costs?

Time orientation costs are costs that have either occurred in the past or will occur in the future. These are important as it considers the relevancy of a particular cost in a business decision.

Relevant Costs

Relevant costs are costs that will make a difference in decision-making and will need to be considered. In other words, it's a cost that hasn't occurred and needs to be considered!

For example, pretend you are a property developer and you can do two options to do an existing property. You could demolish the existing property and build a new house or renovate the existing property. The relevant costs would be the cost to demolish the property and build a new house or the cost to renovate the property.

Sunk Costs

Sunk cost is costs that have already occurred and are not relevant to future decision-making. In other words, it's a cost that has occurred in the past and is not relevant since you can't change it! For example, consider the above example with the construction of a new house or renovation of an existing property.

The sunk cost would the cost of construction of the existing property as the cost has already occurred and is no longer relevant in decision-making

A more simpler example could be you are preparing to throw a dinner party. You have purchased the food and are deciding what drinks to get for the party. The cost of the food is a sunk cost as you have already paid for the food and so it does not matter in the decision of buying drinks.

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