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CA Intermediate · Cost and Management Accounting · Introduction to Cost and Management Accounting

A company's management accountant argues that, unlike financial accounting, cost accounting for a decision on whether to accept a special order should rely mainly on which of the following?

Special order decisions rely on relevant future costs and revenues that differ between the alternatives. Management accounting is forward looking and decision oriented. Sunk costs, historical audited figures and unchanged apportioned fixed costs do not vary with the decision and so are ignored.

  1. AHistorical costs that are fully audited and statutory in nature
  2. BRelevant future costs and revenues that differ between the alternativesCorrect
  3. CSunk costs already incurred on the existing plant
  4. DAllocated apportioned fixed costs under the Companies Act format

Explanation

Decision making in management accounting uses relevant costs, meaning future costs and revenues that differ among alternatives. Sunk and historical costs are irrelevant since they cannot be changed by the decision. Allocated fixed costs that do not change are also irrelevant.

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