Management accountants are frequently asked to analyze various decision situations including the following:

● The cost of a special device that is necessary if a special order is accepted.
● The cost proposed annually for the plant service for the grounds at corporate headquarters.
● Joint production costs incurred, to be considered in a sell-or-process-further decision.
● The costs associated with alternative uses of plant space, to be considered in a make/buy decision.
● The cost of obsolete inventory acquired several years ago, to be considered in a keep-versus-disposal decision.

The costs described in situations I and IV above are examples of:
A) Prime costs.
B) Sunk costs.
C) Discretionary costs.
D) Relevant costs.
E) Opportunity costs.

Question

Management accountants are frequently asked to analyze various decision situations including the following:

●	The cost of a special device that is necessary if a special order is accepted. 
●	The cost proposed annually for the plant service for the grounds at corporate headquarters. 
●	Joint production costs incurred, to be considered in a sell-or-process-further decision. 
●	The costs associated with alternative uses of plant space, to be considered in a make/buy decision. 
●	The cost of obsolete inventory acquired several years ago, to be considered in a keep-versus-disposal decision.

The costs described in situations I and IV above are examples of:
A) Prime costs.
B) Sunk costs.
C) Discretionary costs.
D) Relevant costs.
E) Opportunity costs.

Quizplus · Accepted Answer

The costs described in situations I and IV are relevant costs, meaning they are costs that will be affected by a specific decision and should be taken into consideration when making that decision. Prime costs refer to direct materials and labor, sunk costs are costs that have already been incurred and cannot be recovered, discretionary costs are optional and can be adjusted as needed, and opportunity costs are the benefits foregone by choosing one option over another.

Management Accountants Are Frequently Asked to Analyze Various Decision Situations