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CMA Intermediate · Management Accounting · Introduction to Management Accounting

Kaveri Textiles Ltd. reports a financial accounting profit of ₹4,80,000. A management accountant is preparing a decision report and notes that the firm owns a spare machine that could be rented out for ₹60,000 a year but is instead used in the product line under review. Which figure of profit is relevant for evaluating that product line in a management report, treating the rent forgone as an opportunity cost?

The relevant profit is ₹4,20,000. Management accounting includes opportunity cost, which financial accounting ignores, so the ₹60,000 rent forgone is deducted from the reported profit of ₹4,80,000 to judge the true economic return of the product line.

  1. A₹4,20,000, because the forgone rent is deducted as an opportunity costCorrect
  2. B₹5,40,000, because the forgone rent is added to profit
  3. C₹4,80,000, because opportunity costs are never considered in management accounting
  4. D₹60,000, because only the rent is relevant

Explanation

Management accounting considers opportunity costs even though financial accounting does not record them. Profit after charging forgone rent = 4,80,000 - 60,000 = 4,20,000. Adding the rent (5,40,000) uses the wrong sign.

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