The costs described in situations Ill and V are
Answer(s): B
A sunk cost is a cost that cannot be avoided because the expenditure has already occurred or an irrevocable decision has been made to incur the cost. Sunk costs are irrelevant to management decision making because they cannot vary with the option selected. Both situations Ill and V represent sunk costs because the costs have already been incurred. Management accountants are frequently asked to analyze various decision situations, including the following:I). The cost of a special device that is necessary if a special order is accepted. II). The cost proposed annually for the plant service for the grounds at corporate headquarters.Ill). Joint production costs incurred, to be considered in a sell-at-split versus a process- further decision.IV). The costs associated with alternative uses of plant space, to be considered in a make/buy decision.V). The cost of obsolete inventory acquired several years ago, to be considered in a keep- versus-disposal decision.
The cost described in situation II is a
A discretionary cost is characterized by uncertainly about the relationship of input (the cost) to output. It also tends to be the subject of a periodic decision regarding the outlay to be made. Research, advertising, and public relations are common examples. Thus, the annual cost of plant service is discretionary because of the difficultly of valuing the output.
Total unit costs are
Answer(s): C
Marginal (incremental or differential) analysis determines the differences in costs among decision choices. Total unit costs are not relevant in marginal analysis because of the inclusion of costs that may not 1[vary among the possible choices considered. In marginal analysis, only the incremental costs are relevant.
The term relevant cost applies to all the following decision situations except the
Relevant costs are those expected future costs that vary with the action taken. All other costs are assumed to be constant and thus have no effect on the decision. Relevant costs are considered in the analysis of decisions to make or buy a product, accept a special order, replace capital equipment, or add or delete a product line. Relevant costing applies to many special decisions but not to determining a product price. This decision involves an evaluation of, among other things, demand, competitors' actions, and total manufacturing and selling costs.
Sunk costs
Sunk costs are those that cannot be avoided because the expenditure has already occurred or an irrevocable decision to incur the cost has been made. Sunk costs are irrelevant to management decision making because they cannot vary with the decision choice selected.
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