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ACCA Applied Skills · Performance Management · Make-or-buy and other short-term decisions

Which of the following costs is relevant to a decision on whether to accept a one-off order?

The future cash outlay on a new tool needed only for the order is relevant, because relevant costs are future, incremental cash flows arising from the decision. Depreciation is non-cash, past research costs are sunk, and apportioned administration overhead does not change whether or not the order is accepted.

  1. ADepreciation on existing machinery that will be used for the order
  2. BSpecific future cash outlay for a new tool needed only for the orderCorrect
  3. CResearch and development costs incurred last year on the product
  4. DGeneral administration overhead apportioned to the order

Explanation

Relevant costs are future, incremental cash flows. The new tool is a future cash outlay caused by the order. Depreciation is non-cash, past R&D is sunk, and apportioned overhead does not change with the decision.

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