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In decision making questions we have to apply relevant costing principles :
In some past papers questions of relevant costing I saw that depreciation is considered as notional cost and did not included it in computing relevant cost.
But In Make and Buy Decision I found that While computing cost for Making the product they incorporated Depreciation expense as well, why do they add depreciation expense in costing as it is considered to be irrelevant ?
And one more thing that the question is of shut down of a division and that division has some depreciation of any machine as well which is attributable to this division , but after shut down the division will no longer incur this depreciation, so it will be considered as cost saving and will be mentioned as cost saving or due to depreciation is irrelevant we do not have to take it into account and mention 0 in front of depreciation ?
For make-or-buy decisions, depreciation may sometimes be included in the cost of making the product if the depreciation is directly attributable to the production process and if it represents an incremental cash flow. This could occur if, for example, the decision to make the product requires the use of a new machine, and the depreciation of that machine is considered an incremental cost directly linked to the product’s production.
However, in many cases, depreciation is considered a sunk cost or a notional cost, which means it is not a cash outflow and is not relevant to the decision-making process. Depreciation is often a reflection of past investment decisions and does not represent a future cash outflow.Regarding the shutdown of a division, if the depreciation is specific to the division and ceasing operations would eliminate this depreciation charge, then it could be considered a cost saving. This is because the depreciation charge would no longer be incurred once the division is shut down, and this change in cost as a direct result of the decision to shut down would be relevant.
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