What are sunk costs Opportunity costs incremental costs what is meant by relevant costs?
Sunk costs are historical costs which cannot be changed no matter what future action is taken. Sunk costs are easily identifiable as they will have been paid for, or are owed under a legally binding contract. Incremental costs are the changes in future costs and that will occur as a result of a decision.
What is the meaning of relevant cost?
Relevant cost is a managerial accounting term that describes avoidable costs that are incurred only when making specific business decisions. The concept of relevant cost is used to eliminate unnecessary data that could complicate the decision-making process.
What is sunk cost and opportunity cost?
A sunk cost is money already spent in the past, while opportunity cost is the potential returns not earned in the future on an investment because the capital was invested elsewhere. 1. Buying 1,000 shares of company A at $10 a share, for instance, represents a sunk cost of $10,000.
What is sunk cost?
sunk cost, in economics and finance, a cost that has already been incurred and that cannot be recovered. In economic decision making, sunk costs are treated as bygone and are not taken into consideration when deciding whether to continue an investment project.
What are incremental relevant costs?
Incremental costs are relevant in making short-term decisions or choosing between two alternatives, such as whether to accept a special order. If a reduced price is established for a special order, then it’s critical that the revenue received from the special order at least covers the incremental costs.
Is sunk cost relevant?
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.
Are opportunity costs relevant costs?
Opportunity Cost Decision Making. An opportunity cost is a hypothetical cost incurred by selecting one alternative over the next best available alternative. Opportunity costs are relevant in business decision making. In addition, companies commonly use them when evaluating corporate projects.
How does opportunity cost vary?
The most desirable alternative given up as the result of a decision. How does opportunity cost vary? Based on what is being given up by making the decision.
What is opportunity cost give some examples of opportunity cost how these cost are relevant for managerial economics?
A student spends three hours and $20 at the movies the night before an exam. The opportunity cost is time spent studying and that money to spend on something else. A farmer chooses to plant wheat; the opportunity cost is planting a different crop, or an alternate use of the resources (land and farm equipment).
What is relevant cost in management accounting?
A relevant cost is a cost that only relates to a specific management decision, and which will change in the future as a result of that decision. The relevant cost concept is extremely useful for eliminating extraneous information from a particular decision-making process.
What is incremental and opportunity cost?
Choosing one option may mean you lose money because you turned down another alternative. These incremental costs are called opportunity costs. For example, say you choose to take the day off from work to go bike shopping, losing $100 in income. That lost income is an opportunity cost.
What are sunk costs are these costs relevant to an incremental analysis?
Relevant Versus Non-Relevant Costs
Because the sunk costs will remain regardless of any decision, these expenses are not included in incremental analysis.
What is the difference between the terms incremental cost opportunity cost and sunk cost How are these terms related to decision-making?
Terms in this set (16)
An incremental cost is the change in cost that will result from some proposed action. An opportunity cost is the benefit that is lost when rejecting some course of action. A sunk cost is a cost that has already been incurred and that cannot be changed by any future decision.
How do incremental and sunk cost differ from marginal cost?
While marginal cost refers to the change in total cost resulting from producing an additional unit of output, incremental cost refers to total additional cost associated with the decision to expand output or to add a new variety of product etc. It represents the difference between two alternatives.
What is the difference between a sunk cost and a differential cost?
Sunk costs—costs incurred in the past that cannot be changed by future decisions—are not differential costs because they cannot be changed by future decisions. Direct fixed costs—fixed costs that can be traced directly to a product line or customer—are differential costs and therefore pertinent to making decisions.