Final answer:
Allocated costs must be treated as relevant or incremental costs depending on the project and its specific circumstances. These costs vary based on decisions made regarding the project and are pertinent for project assessment and decision-making.
Step-by-step explanation:
Allocated costs must be treated as relevant or incremental costs depending on the project. Unlike fixed costs that do not change with the level of production or service, relevant or incremental costs are those that can be directly tied to a specific project and, therefore, will vary based on the decisions made regarding that project.
For instance, if a company is assessing whether to start a new product line, the additional costs for materials and labor are relevant costs since they would not be incurred if the project is not pursued. However, allocated fixed costs such as overhead may not necessarily be relevant because they would remain the same whether or not the new product line is launched.
In contrast, sunk costs, which have already been incurred and cannot be recovered, should not be considered in decision-making as they are not incremental. It is therefore important for decision-makers to distinguish between allocated costs that are relevant for a particular decision and those that are not.