The term that refers to costs incurred in the past that are not relevant to a future decision is

The term that refers to costs incurred in the past that are not relevant to a future decision is

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.

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What is a cost that is incurred in the past?

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 type of costs are those that have been incurred in the past and are not recoverable?

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.

What are costs from the past that are not important to the decision making process?

1. Sunk costs (past costs) or committed costs are not relevant. Sunk, or past, costs are monies already spent or money that is already contracted to be spent. A decision on whether or not a new endeavour is started will have no effect on this cash flow, so sunk costs cannot be relevant.

What is another name for a relevant cost?

Definition: Relevant cost, also called differential cost, is a management accounting term decsribing costs that pertain to a particular decision.