Question

Which of the following best describes a "relevant cost"?

A) A factor that restricts production or sales of a product
B) Cost of developing, producing, and delivering a product or service
C) Expected future costs that differ among alternatives
D) Costs that were incurred in the past and cannot be changed

Answer 1

A relevant cost refers to expected future costs that are different among various alternatives and play a crucial role in decision-making. Sunk costs, in contrast, do not affect future decisions as they are past expenses and unchangeable.

Step-by-step explanation:

A "relevant cost" is best described as expected future costs that differ among alternatives. These costs are critical in making decisions because they will change depending on the path that a business takes. For instance, if a company is deciding between two production methods, the relevant cost would be the difference in cost between these two methods going forward, not any costs incurred in the past.

It's important to distinguish relevant costs from sunk costs, which are costs that have already been incurred and cannot be recovered. Sunk costs should not influence future business decisions because they will not change regardless of the direction the company chooses.

In contrast, variable costs are significant as they provide insight into how costs can be managed in the present and how they might increase with rising production levels.