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ACCA Applied Knowledge · Management Accounting · Accounting for management

A company spends $12,000 per year producing a detailed variance report. Managers estimate the report helps them avoid cost overruns worth $9,000 per year. Which statement is correct?

The report fails the cost-benefit test. It costs $12,000 a year but saves only $9,000, leaving a net shortfall of $3,000. Information should be worth more than the cost of producing it, so this report is not cost-effective.

  1. AThe report fails the cost-benefit test because its cost exceeds its benefit by $3,000Correct
  2. BThe report passes the cost-benefit test because the benefit is $9,000
  3. CThe report fails because it is not accurate
  4. DThe report passes because the cost is a sunk cost

Explanation

Information should be worth more than it costs to produce. Benefit of $9,000 less cost of $12,000 gives a net loss of $3,000, so the report is not cost-effective. The benefit alone does not decide the matter, and nothing suggests inaccuracy or sunk cost.

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