- 4 Marks
Question
Relevant Cost
Relevant cost should be used for assessing the economic and financial consequences of any decision made by management. Only relevant cost and benefits should be taken into consideration when evaluating the financial consequences of a decision.
Required:
Explain TWO key concepts of relevant cost.
Answer
- Future Costs: Relevant costs are costs that will occur in the future as a direct result of the decision being made. Past costs or sunk costs are irrelevant because they cannot be changed by future decisions.
- Differential Costs: Relevant costs are the costs that differ between alternatives. If a cost remains the same regardless of the decision, it is considered irrelevant. Only those costs that vary with the decision are relevant.
- Tags: Costs, Financial Decision-Making, Management Accounting, Relevant Cost
- Level: Level 1
- Topic: Relevant Cost and Revenue
- Series: Nov 2024
- Uploader: Salamat Hamid