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 incurred, to be considered in a sell-at-split-off-point-versus-process-further decision.
(3) Research and development (R&D) costs incurred in prior months, to be considered in a new-product-introduction decision.
(4) The cost of a special device that is necessary if a special sales order is accepted.
(5) The cost of obsolete inventory to be considered in a keep-versus-disposal decision.

The costs described in situations 1 and 4 above are:
A) Prime costs.
B) Sunk costs.
C) Discretionary costs.
D) Relevant costs.
E) Fully-absorbed costs.

Question

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 incurred, to be considered in a sell-at-split-off-point-versus-process-further decision. 
(3) Research and development (R&D) costs incurred in prior months, to be considered in a new-product-introduction decision. 
(4) The cost of a special device that is necessary if a special sales order is accepted. 
(5) The cost of obsolete inventory to be considered in a keep-versus-disposal decision.

The costs described in situations 1 and 4 above are:
A) Prime costs.
B) Sunk costs.
C) Discretionary costs.
D) Relevant costs.
E) Fully-absorbed costs.

Quizplus · Accepted Answer

The costs identified in situations 1 and 4 are relevant costs since they are future costs that can be affected by the decision being made. Prime costs are the direct costs of production such as labor and materials, sunk costs are costs that have already been incurred and cannot be changed, discretionary costs are costs that can be controlled or avoided, and fully-absorbed costs refer to the total cost of production including both fixed and variable costs.

Management Accountants Are Frequently Asked to Analyze Various Decision Situations