CMA Foundation · Fundamentals of Financial and Cost Accounting · Classification of Costs (CAS 1)
A firm is deciding whether to accept a special order. Which of the following costs is a differential (incremental) cost of accepting the order?
The additional power cost of Rs 12,000 is the differential cost, because it arises only if the order is accepted. Unchanged depreciation, fixed rent and a past survey cost do not vary with the decision.
- AAdditional power cost of Rs 12,000 that will arise only if the order is acceptedCorrect
- BDepreciation on existing machinery, which remains unchanged
- CFactory rent already fixed for the year and unaffected by the order
- DCost of a market survey conducted last year
Explanation
A differential cost is the change in cost arising from choosing one alternative over another. Extra power of Rs 12,000 arises only if the order is accepted. Existing depreciation and fixed rent do not change, and last year's survey is a sunk cost.
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