 Chapter 3 Cost concepts, classification and segregation MULTIPLE CHOICE Costs classification 1.The term relevant cost applies to all the following decision situations except the A.Acceptance of a special order.. B.Determination of a product price. C.Replacement of equipment. D.Addition or deletion of a product line. (cma) 1.B ?A situation where the term relevant cost does not apply. Relevant costs are those used in making decision. These costs have two characteristics – differential costs and future costs. The term relevant costs applies to the acceptance or rejection of a special sales order, replacement or retention of equipment, addition or deletion of a product line, and even in the determination of a product price. Among the choices given, however, choice-letter “b” is the best answer because relevant cost is least applied in the determination of regular selling price. 2.A decision-making concept, described as “the contribution to income that is foregone by not using a limited source for its best alternative use,” is called A.Marginal Cost.C.Potential Cost. B.Incremental Cost.D.Opportunity Cost. (cma) 2.D ?The term used to describe the contribution to income that is foregone by not using a limited source for its best alternative use. The benefit foregone or sacrificed for not using a limited resource for its best alternative use is called an opportunity cost, hence, choice-letter “d” is correct. Choice-letter “a” is incorrect because marginal cost is the increase in cost per unit of product. Choice-letter “b” is incorrect because incremental cost is the total increase in cost from an alternative to another. Choice-letter “c” is incorrect because potential cost may refer to future cost that may arise if an alternative is chosen. 3.In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component? A.LaborC. Depreciation B.Overhead D.Selling.(cma) 3.C ?The cost that is not likely to contain a variable cost component. Choice-letter “c” is the correct answer. Depreciation expense, if the problem is silent, is a fixed cost, and therefore, not variable neither would contain a variable component. Choice-letter “a”, labor is academically treated as a variable cost. Choice-letter “b”, overhead, has both the variable and fixed cost components. Choice-letter “d”, selling expense, also has both the variable and fixed cost components. 46 Which term refers to cost incurred in the past that are not relevant to a decision?Sunk costs are those which have already been incurred and which are unrecoverable. In business, sunk costs are typically not included in consideration when making future decisions, as they are seen as irrelevant to current and future budgetary concerns.
What is an incurred cost that Cannot be changed?The sunk cost is that cost which has already been incurred and can not be recovered. Sunk cost is considered irrelevant in future decision making as this has already been incurred.
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A cost incurred in the past that is not relevant to any current decision is classified as a(n):
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