The core idea
Financial accounting tells you what happened. Management accounting tells you what to do next. The central discipline is identifying which costs will actually change with your decision — the rest (sunk costs, allocated overheads) are noise. Contribution margin, break-even analysis and relevant costing all flow from this one idea. — after Likierman & Horngren
The hero diagram
Cost behaviour matrix.
Two axes that decide how a cost behaves — and what it tells you.
The rules on the page
The rules of the game.
How to apply
Running a make-or-buy decision.
- List every cost that changes. If it is the same in both options, delete it.
- Ignore sunk costs. The factory is built. That money is gone.
- Ignore allocated overhead. It is an accounting convention, not a decision input.
- Compare total relevant costs. Whichever is lower wins — subject to strategic considerations.
Key reading · Session 7 · Likierman
Costing for decisions.
CVP analysis and relevant costing are the backbone of most operating decisions — pricing, product mix, make-or-buy, outsourcing. The common mistake is including allocated overhead in the comparison, which makes every new business look unprofitable and every existing business look essential.
Only future costs that differ between options count.