Relevant Cost on Decision Making

An accounting information system should be designed to provide useful information. To be useful the information must be:

• qualitative not quantitative

• unique and unavailable through other sources

• historical in nature and not purport to predict the future

• relevant, accurate and timely

If a management accountant is trying to decide whether a cost is relevant to a decision, he or she should consider the cost relevant if:

• it is a historical cost precise in nature.

• it is an expected future cost that is different for each alternative

• it is a historical cost that is the same among all alternatives.

• it is an expected future cost that is the same for each alternative

In order for information to be relevant, the decision to be made must have an effect on:

• future cost or revenues

• past cost or revenues

• the timeliness of information

An opportunity cost is defined as:

• the profit of the next best alternative foregone

• the additional (incremental) cost of accepting the order

• the additional revenue if we do not drop the product.

Which of the following would be a relevant cost that would need to be considered for pricing a special order?

• Existing fixed manufacturing overhead

• Additional set-up costs for the special order

• . Non-manufacturing costs that will not change even if the special order is accepted

Sunk costs, unitising costs, how costs are allocated, and leaving out opportunity costs are all factors where errors are often made, and will ultimately affect the outcome of the decision.

• TRUE

• FALSE

Efficient decision-making tends to consider relevant information only and this information focuses on incremental revenue and expenses.

• TRUE

• FALSE

The book value of an asset such as equipment is an example of:

• a future cost

• a sunk cost.

• an opportunity cost.

Which of the following statements about relevant information is/are true?

i. For information to be relevant, it must relate to the future.

ii. For information to be relevant, it must differ between the alternatives.

iii. For information to be relevant, it must be completely accurate

• i and ii

• i and iii

• All of the given answers

When a department or a product is showing a loss after all costs have been traced and allocated, a company has no option but to make the decision to either close the department or drop the product.

• TRUE

• FALSE