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ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting

Harbourview Hotels plans to close one of its three hotels. The hotel's depreciation of the building is $400,000 a year, the hotel manager's salary is $90,000 a year and is specific to that hotel, and a share of head office costs of $250,000 is allocated to it. Head office costs will not change if the hotel closes. Which of the following costs is relevant to the closure decision?

The hotel manager's salary is relevant because it is a future cash cost that would be avoided if the hotel closes. Allocated head office costs continue anyway and depreciation is a non-cash sunk-based charge, so neither differs between the alternatives.

  1. AThe hotel manager's salary of $90,000, because it would be avoided on closureCorrect
  2. BThe allocated head office costs of $250,000, because they are charged to the hotel
  3. CThe depreciation of $400,000, because it is a fixed cost of the hotel
  4. DNone of the three costs, because all are fixed costs

Explanation

Relevant costs are future, incremental cash flows that differ between the alternatives. The manager's salary is avoided on closure, so it is relevant. Head office costs continue regardless, and depreciation is a non-cash, past-based cost. Being fixed does not make a cost irrelevant, so the final option is wrong.

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