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CA Intermediate · Cost and Management Accounting · Introduction to Cost and Management Accounting

Rajesh Textiles Ltd. wants to know how much its total cost would change if it produced one more lot of 100 metres of fabric. Which cost concept gives this information?

The relevant concept is incremental or differential cost, which measures the extra total cost arising from producing one more lot. Sunk costs are past and unaffected, opportunity cost measures benefit forgone, and notional cost is an imputed figure not actually incurred in cash.

  1. ASunk cost
  2. BIncremental (differential) costCorrect
  3. COpportunity cost
  4. DNotional cost

Explanation

Incremental cost is the additional cost incurred when output or activity rises by a unit or lot. Sunk costs are already spent and do not change with the decision. Opportunity cost is the benefit forgone from the next best alternative, and notional cost is an imputed cost not actually paid.

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