ACCA Applied Skills · Performance Management · Relevant cost analysis
Dalton Co is pricing a one-off contract. Which of the following overhead items is relevant to the decision?
The extra electricity of $1,200 is relevant. It is an incremental future cash cost that arises only if the contract is accepted. Depreciation, absorbed head office costs and apportioned rent are unchanged by the decision, so they are not relevant.
- ADepreciation of existing machinery used on the contract
- BA share of head office administration costs absorbed at $4 per labour hour
- CExtra electricity of $1,200 that will be incurred only if the contract is undertakenCorrect
- DFactory rent apportioned to the contract on floor area
Explanation
Only incremental future cash flows are relevant. The extra electricity arises only if the contract goes ahead. Depreciation, absorbed head office costs and apportioned rent would be incurred regardless, so they are not relevant.
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