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CMA Foundation · Fundamentals of Financial and Cost Accounting · Classification of Costs (CAS 1)

Anand Ltd. is considering dropping Product P. The annual costs of P include direct materials Rs 2,00,000, direct labour Rs 1,00,000 and allocated common factory rent Rs 60,000, which would continue even if P is dropped. Which of these costs is an avoidable cost for this decision?

Direct materials and direct labour are the avoidable costs. They would not be incurred if Product P is dropped. The allocated factory rent continues regardless, so it is unavoidable and does not affect the decision.

  1. AAllocated factory rent only
  2. BDirect materials and direct labour onlyCorrect
  3. CDirect materials only
  4. DAll three costs

Explanation

Avoidable costs are those that would be saved if the product were dropped. Direct materials and direct labour (Rs 3,00,000) would stop, whereas the allocated rent continues and is therefore unavoidable. Including the rent would wrongly treat a continuing cost as saved.

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