Question

Error costs can be defined as

a. the costs associated with the measurements required by the cost management system
b. unit costs assigned based on activities
c. the costs associated with making poor decisions based on bad cost information
d. none of these

Answer 1

Error costs are associated with the negative outcomes of decisions made based on incorrect cost information, which can lead to detrimental financial consequences for a business. So, the correct answer is option c.

Step-by-step explanation:

Error costs refer to the costs associated with making poor decisions based on bad cost information. These are the consequences faced by a business when it acts on inaccurate costing figures. Such erroneous data can lead to inappropriate pricing, investment, or budgeting decisions that have the potential to adversely affect the firm's financial status and competitive position.

It is essential to differentiate between different concepts of costs, such as fixed cost, marginal cost, average total cost, and average variable cost, as each provides unique insights for the firm. A decision-making tool such as a Cost Benefit Analysis can assist in weighing these costs against potential benefits.

Moreover, costs in a business setting are not limited to explicit, out-of-pocket expenses. Implicit costs, representing the opportunity cost of using owned resources, are just as important to consider, especially for resource allocation and assessing the real profitability of a firm.