Managerial Accounting and Finance - Billy Whizz - Essay Example

Decision relevance focuses on those cost and revenue aspects that the conventional accounting principle of matching may ignore. The main difference between the fundamental accounting principle and the decision relevance theory is that the former tends to focus on the amount paid for any expense incurred whilst ignoring any other incremental costs that may be incurred in the future if any company wishes to undertake any given project. Besides such issues, the conventional accounting principle also ignores the impact of opportunity costs. Decision relevance on the other hand tries to focus on all such costs which might be incurred due to the incidence of any given project. Opportunity costs are also given high regard in decision relevance and they are considered an important aspect of any given decision.

According to the conventional accounting principle, Option A seems to be more appropriate as it reduces the loss which is to be endured by the company. Under this principle, the company bears a loss of £31.9 million (£31,966,666.66) and if the company follows Option B it faces a loss of around £33.2 million (33,200,000). There is an evident saving of £1.2 million (£1,233,334) if Option A is selected under the Conventional accounting principle. Option A leads the company to close all its operations and tends to receive the Revenue from the existing catapults produced. Under Option A the existing catapults produced by the company would generate £15 million and the costs incurred in this regard would be approximately £49.6 million (£49,666,666).

On the other hand, the revenue generated under Option B would be £35 million (£35,000,000) which would be much higher than the revenue generated from Option A, this increased revenue would be generated because of the increased sales of the existing 500 units of catapults and the extra 500 units to be produced by the company. The costs to be endured under Option B are £68.2 million (£68,200,000). The increased revenue generated by selling 1000 units at a higher rate is overshadowed by the increased costs tolerated by the company. Such increased costs have put up an extra burden on the incremental revenue generated from Option B. As a result of these inflated costs, the loss generated through Option B would be Read More