COST ACCOUNTING
INFORMATION FOR DECISION MAKING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The variable manufacturing costs to produce the special order.
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The expected revenues.
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The fixed cost involved.
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The sunk cost
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The unavoidable costs.
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Detailed explanation-1: -’Relevant costs’ can be defined as any cost relevant to a decision. A matter is relevant if there is a change in cash flow that is caused by the decision. The change in cash flow can be: additional amounts that must be paid.
Detailed explanation-2: -What is a relevant cost? A relevant cost is one that we incur as a direct response to a particular decision. And likewise, a relevant revenue is the same, just instead of a cost, we incur a revenue as a result of a particular decision. This would normally be a management decision.
Detailed explanation-3: -If the company is not operating at capacity-in other words, the company has unused capacity-then the fixed costs are irrelevant to the decision if the special order can be met with this unused capacity.
Detailed explanation-4: -Relevant costs are costs that will be affected by a managerial decision. Irrelevant costs are those that will not change in the future when you make one decision versus another. Examples of irrelevant costs are sunk costs, committed costs, or overheads as these cannot be avoided.