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

A firm bought a machine two years ago for Rs 8,00,000 with a current book value of Rs 5,00,000. It can be sold today for Rs 3,00,000. The firm is deciding whether to keep using it for a new job. For this decision, which statement about the Rs 5,00,000 is correct?

The Rs 5,00,000 book value is a sunk cost and is irrelevant to the decision. It results from a past outlay that no current choice can alter. The relevant amount is the Rs 3,00,000 resale value forgone, which is the opportunity cost.

  1. AIt is a sunk cost and is irrelevant to the decisionCorrect
  2. BIt is an opportunity cost and must be included in the job cost
  3. CIt is a differential cost and is relevant
  4. DIt is an imputed cost and must be added to the job

Explanation

The book value arises from a past purchase and cannot be changed by the present decision, so it is a sunk cost and irrelevant. The relevant figure is the Rs 3,00,000 sale value forgone, which is the opportunity cost of using the machine.

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