The costs described in situations 1 and 4 are
Answer(s): D
Alternative uses of plant space to be considered in a make/buy decision and the cost of a special device necessary for acceptance of a special order are examples of relevant costs. Relevant costs are future costs that are expected to vary with the action taken. Other costs thus have no effect on the decision.Management accountants are frequently asked to analyze various decision situations, including the following.1. Alternative uses of plant space, to be considered in a make/buy decision.2. Joint production costs incurred1 to be considered in a sell-at-split versus a process- further decision.3. Research and development costs incurred in prior months, to be considered in a product-introduction decision.4. The cost of a special device that is necessary if a special order is accepted.5. The cost of obsolete inventory acquired several years ago, to be considered in a keep- versus-disposal decision.
The costs described in situations 2, 3, and 5 are
Answer(s): A
Joint production costs are irrelevant to deciding whether to sell at split-off or to process further. Similarly, already incurred R&D costs and the costs of obsolete inventory are irrelevant to future decisions. Thus, these are examples of sunk costs. Sunk costs are unavoidable. They are the result of a past irrevocable decision and thus have no relevance to future decisions.
Relevant or differential cost analysis
Answer(s): C
Relevant cost analysis considers only those costs that differ among decision options. Both fixed and variable costs are considered if they vary with the option selected.
Opportunity costs are
Opportunity cost is the maximum benefit forgone by using a scarce resource for a given purpose. It is the benefit provided by the next best use of that resource. An opportunity cost is therefore relevant to the decision process.
The opportunity cost of making a component part in a factory with no excess capacity is the
An opportunity cost is the return from the next best opportunity that could have been selected for the use of scarce resources. It does not represent an actual receipt or disbursement of resources and is not recorded in the accounting records. If the part could be made using otherwise idle capacity, there would be no opportunity cost.
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