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 versus a process-further decision.
(3)Research and development costs incurred in prior months,to be considered in a product-introduction decision.
(4)The cost of a special device that is necessary if a special 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)Differential costs.

Question

Quizplus · Accepted Answer

The costs described in situations 1 and 4 are relevant costs, meaning they are future costs that will differ between the alternatives being considered, and therefore are important in making a decision. Sunk costs (B) are past costs that cannot be changed or recovered and are not relevant to future decisions. Discretionary costs (C) are costs that can be controlled or eliminated by management, but are not necessarily relevant to the decision being made. Prime costs (A) refer to direct materials and direct labor, and are not relevant to these decision situations. Differential costs (E) are similar to relevant costs, but refer specifically to the difference in cost between two alternatives.

Management Accountants Are Frequently Asked to Analyze Various Decision Situations