1. A new product has a direct material cost of $5.50, a direct labour cost of $2.

00 and
a fixed overhead apportionment of $3.50. Production during the first month was
23,000 units and sales were 21,000 units.
Calculate to the nearest $ the inventory valuation under both marginal costing and
absorption costing.
Marginal Costing: ____ (to the nearest $)
Absorption Costing: ____ (to the nearest $)
Advice
The correct answers are: Marginal Costing: $15,000 and Absorption Costing:
$22,000.
Marginal cost of product = Direct material cost + direct labour cost
= $5.50 + $2.00
= $7.50
In marginal costing, closing inventories are valued at marginal production cost
which includes the direct material cost of $5.50 and the direct labour cost of $2.00
for 2,000 units.
Therefore inventory valuation
= $7.50 x 2,000
= $15,000.
Absorption cost of product = Marginal cost + fixed production overheads
= $7.50 + $3.50
= $11.00
In absorption costing, closing inventories are valued at S11 each, (this includes a
share of fixed production overheads).
Therefore inventory valuation
= $11x2,000
= $22,000
2. A manufacturing company, Leyton Friday Co, has three production departments
X, Y and Z. A predetermined overhead absorption rate is established for each
department on the basis of machine hours at normal capacity. The overheads of
each department consist of the directly allocated costs of each department plus a
share of the service department's overhead costs. All overheads are fixed costs.
The table below shows incomplete information available relating to the period just
ended

Production department Z
Budgeted directly allocated overhead expenses

$61,500

Budgeted service department apportionment

$42,000

Normal machine capacity (hours)

(?)

Predetermined absorption rate per machine hour

(?)

Actual machine utilisation (hours)

10,000 hrs

Over/(under) absorption of overhead

$(11,500)

Actual overhead expenditure incurred in each department was as per budget.

Normal capacity and the absorption rate per hour in Department Z were:
Normal capacity____hours, absorption rate per hour of $____(to the nearest cent)
Advice
The correct answer is: Normal capacity 11,250 hours, absorption rate per hour of
$9.20.
Department Z

Actual overhead expenditure (same as budget, 561,500 + 103,500

542,000)
Under-absorbed overhead
-11,500
Overhead actually absorbed into production costs

92,000

Actual machine hours

10,000 hrs

Absorption rate per hour

59.20

Normal capacity = budgeted overheads/ absorption rate = 11,250hrs

$103,500/59.20 per hr =
In order to calculate normal capacity, you need to calculate the actual overhead
expenditure (same as budgeted) and the overhead absorption rate.
3. When opening inventories were 8,500 litres and closing inventories 7,100 litres,
Scooby Snacks Co had a profit of $61,000 using marginal costing. Assuming that
the fixed overhead absorption rate was $4 per litre, what would be the profit using
absorption costing?
Profit is $____
Advice
The correct answer is: $55,400Change in inventory levels in period
= (8,500 - 7,100) units
= 1,400 units decrease
Fixed overhead absorption rate
= $4 per unit
Therefore difference in profits

= 1,400 x$4
= $5,600 less under absorption costing
Therefore absorption costing profit
= marginal costing profit - $5,600
= $61,000 - $5,600
= $55,400
4. When opening inventories were 8,500 litres and closing inventories 10,000 litres, a
firm had a profit of $75,000 using marginal costing. Assuming that the fixed
overhead absorption rate was $3 per litre, what would be the profit using
absorption costing?
Profit would be $____
Advice
The correct answer is: $79,500.
If OAR is $3 per litre and there are 1,500 more litres in inventory at the end of the
period than at the beginning, the increase in profit = $3 x 1,500 = $4,500
Therefore, profit under absorption costing
= marginal costing profit + $4,500
= $75,000 + $4,500
= $79,500
5. Which of the following statements about marginal costing systems are true?
a. Such systems incorporate fixed overheads into the value of closing
inventory,
b. Such systems necessitate the calculation of under-/over-absorbed
overheads,
c. Such systems value finished goods at the variable cost of production.
d. Such systems write off fixed overheads to the income statement in the
period in which they were incurred.
Advice
The correct answers are: Such systems value finished goods at the variable cost of
production; Such systems write off fixed overheads to the income statement in the
period in which they were incurred.
6. Profits under absorption costing were $101,500 whilst under marginal costing the
profit was only $97,500. Fixed overheads are absorbed at S8 per unit and 2,250
units are held in closing inventory.
How many units of opening inventory were there?
____units
Advice

The correct answer is: 1,750 units.

$
101,500
97.500
4.000

Absorption costing profits

Marginal costing profits
Difference in profits
$4,000 / $8 = 500 units
Absorption costing profits are greater than marginal costing profits when
inventory levels increase in a period. Therefore opening inventory units = 2,250 500 = 1,750 units.
7. Budgeted fixed overheads for cost centre 1 during the last accounting period were
$75,000 for apportioned overheads and $95,000 for allocated overheads. A
predetermined machine hour rate is used to absorb fixed overheads into product
costs. Budgeted machine hours during the period were 1,800. Actual fixed
overheads were $177,770.
What was the predetermined fixed overhead absorption rate?
The predetermined fixed overhead absorption rate was $____(To 2 decimal
places.)
Advice
The correct answer is: $94.44.
Clear
Fixed overhead absorption rate = budgeted overheads / budgeted machine hours
= $170,000/1,800
= $94.44
8. In a period, opening inventories were 10,000 units and closing inventories were
11,000 units.
Profits, based on marginal costing were $100,000 and profits under absorption
costing were $105,000. Calculate the fixed overhead absorption rate per unit.
$____
Advice
The correct answer is: $5.
Change in inventory levels in period
=(11,000-10,000) units
= 1,000 units (increase)
Difference in profits due to fixed overheads
= $105,000-$100,000
= $5,000
Therefore, fixed overhead absorption rate per unit
= $5,000/1,000 units

= $5 per unit
9. Which three of the following are disadvantages of absorption costing, as compared
to marginal costing?
a. It is less appropriate for decision making,
b. Overheads are ignored.
c. There is no clear relationship between profit and volume,
d. It is possible to manipulate profits by changing production volumes,
e. It does not comply with accounting standards.
Advice
The correct answers are: There there is no clear relationship between profits and
volume; It is possible to manipulate profit by changing production volumes; It is
less appropriate for decision making.
By including a share of overheads in the unit cost of a product, absorption costing
does comply with accounting standards. The disadvantage of this is that profits
can be manipulated by changing production volumes. One of the main arguments
in favour of marginal costing is that it is a great aid to decision making and
therefore absorption costing is known to be less appropriate for decision making.
10. Mel Co has recorded a profit under absorption costing of $1,750. The cost card for
Mel Co's only product, the XZ, is as follows.
$
Direct materials

10

Direct labour

12

Fixed overheads

Sales and distribution overheads

Total

29

Opening inventories of XZ were 100 units and closing inventories were 150 units.
What was the profit under marginal costing?
Profit under marginal costing was $____
Advice
The correct answer is: $1,500.
Inventory increase = 150 units -100 units = 50 units Profit reconciliation:
Marginal costing profit

1,500

Adjust for fixed overhead in inventory: 250

inventory increase of 50 units x 55 per unit
Absorption costing profit
1,750
11. Budgeted overheads for a period were $340,000. At the end of the period the
actual labour hours worked were 21,050 hours and the actual overheads were
$343,825. If overheads were over absorbed by $14,025, how many labour hours
were budgeted to be worked?
Budgeted labour hours = ____
Advice
The correct answer is: 20,000 labour hours.
Actual overheads
= $343,825
Over absorption
= $14,025
Absorbed overheads
= Actual overheads + over absorbed overheads
= $343,825 + $14,025
= $357,850
If the absorbed overheads = $357,850 then the budgeted overhead absorption rate
= Absorbed overheads/actual labour hours = $357,850/21,050 = $17 per labour
hour.
If budgeted overheads for the period were $340,000 and the budgeted overhead
absorption rate is $17 per labour hour, then the budgeted labour hours = budgeted
overheads/overhead absorption rate = $340,000/$17 = 20,000 hours.
12. The budgeted overhead absorption rate for variable production overheads in
department X of Lublin Co's factory is S3.00 per direct labour hour and for fixed
overhead is S4.50 per direct labour hour. Actual direct labour hours worked
exceeded the budget by 500 hours.
If expenditures were as expected for variable and fixed overheads, the total overabsorbed overhead for the period would be:
Total over-absorbed overhead would be $____
Advice
The correct answer is: $2,250.
When expenditures are as budgeted, but actual and budgeted production activity
levels are different, only fixed overhead can be under- or over-absorbed.
Over-absorbed overhead
= 500 hrs x $4.50
= $2,250.
Variable overhead absorbed = (500 x S3.00) = $1,500 more than budgeted in the
fixed budget.

Variable overhead incurred would be $1,500 more as well, leaving neither undernor over-absorbed variable overheads.
13. Absorption costing will result in the same profit as marginal costing in which of
the following situations?
a. When closing inventory is greater than opening inventory,
b. When opening and closing inventory volumes are the same,
c. When inventory levels are constant,
d. When opening inventory is greater than closing inventory.
e. When no inventory is held as opening inventory and no inventory is held as
closing inventory.
Advice
The correct answers are: When opening and closing inventory volumes are the
same; When no inventory is held as opening inventory and no inventory is held as
closing inventory; When inventory levels are constant.
Absorption costing and marginal costing will give rise to the same profits if
inventory levels do not change ie when opening and closing inventory volumes are
the same, when no inventory is held as opening inventory and no inventory is held
as closing inventory and when inventory levels are constant.
When inventory levels are decreasing, marginal costing profit will be greater than
absorption costing profit (and vice versa).
14. A company does not hold any opening or closing inventories. Which of the
following statements is true?
a. Profits will be higher if marginal costing is used.
b. Profits would be the same if either absorption costing or marginal costing
were used.
c. It is impossible to determine whether absorption costing or marginal
costing would produce the higher profit without being provided with
figures.
d. Profits will be higher if absorption costing is used.
Advice
The correct answer is: Profits would be the same if either absorption costing or
marginal costing were used. Profits will be the same under both methods, as
opening inventory equals closing inventory.
It is possible to determine what will happen without being provided with figures.
It is changes in inventory levels that cause these two costing systems to give
different profit figures.

15. A process involves a very labour intensive action mid-way through. Work in
progress is therefore split into two to enable the number of equivalent units of
production to be calculated.
At the end of the 47th week, finished goods output was 129 units, with work in
progress of 49 units, 34 of which are 15% complete as to labour and 15 which are
86% complete as to labour.
Calculate the number of equivalent units of production included in work in
progress for labour during week 47.
The number of equivalent units of production included in work in progress for
labour is: ____
Advice
The correct answer is: 18.
Labour

Units

34 units * 15%

5.1 units

15 units * 86%

12.9 units

Total

18 nits

16. Which three of the following statements concerning CVP analysis are true?
a. A change in the estimate of fixed costs will alter the slope of the line on a
P/V chart,
b. Changes in inventory levels are ignored.
c. Only one product at a time can be analysed on a breakeven chart,
d. An assumption is made that variable costs per unit are the same at all levels
of output,
e. A change in the selling price per unit will alter the slope of the line on a
PA/ chart.
Advice
The correct answers are: Changes in inventory levels are ignored; A change in the
selling price per unit will alter the slope of the line on a PN chart; An assumption
is made that variable costs per unit are the same at all levels of output.
CVP analysis assumes that sales = production (ie that there is no change in
inventory levels) and that variable costs per unit are the same over the relevant
range. However, a change in the estimate of those variable costs per unit over the
whole range will change the slope of the line on a P/V chart. A change in the
estimate of fixed costs will not alter the slope of the line, but will change the point
of intersection with the vertical axis. It is possible to analyse more than one

product using a breakeven chart, but only if the sales mix is the same over the
relevant range.
17. Libre Co uses job costing to calculate the price of a job. Job XY25 uses materials
valued at $100 and 5 hours of labour which is paid at S10 per hour. Overheads are
absorbed at a rate of 20% of the cost of materials used.
If Libre Co wants to achieve a profit margin of 20%, calculate the price to be
quoted for J XY25 (to the nearest cent).
$____ (to the nearest cent).
Advice
The correct answer is: $212.50.
The cost card for Job XY25 is as follows.
Materials

S100

Labour (5 hours x S10)

$50

Overheads (20% x S100)

S20

Total cost

S170

Profit margin (see working)

S42.50

Job XY25 price

S212.50

Working
If profit margin
Profit

= 20%

= 20/80 x total cost

= 20/80x$170
= $42.50
18. A manufacturing company produces a patented chemical that has to pass through
two processes, Distillation and Finishing, before completion.
In the Distillation process losses of 10% of input are usually experienced due to
evaporation, with all good output being transferred to the Finishing process.
In April, materials input to Distillation were 2,000 units at a cost of $6.50 per unit
and conversion costs were $5,000. Output transferred to Finishing was 1,500 units.
What was the value of the abnormal loss/gain in the period?
There was an abnormal loss valued at $____
Advice
The correct answer is: $3,000.
Input units
= 2,000.

Normal loss

= 10%*2,000
= 200.
Cost/unit of good output
= ((2,000*$6.50)+$5,000)/(2,000-200)
= $18,000/1,800
= $10.
Expected output - Actual output = 1,800-1,500
= 300 units
= abnormal LOSS.
Value of abnormal loss
= 300*$10
= $3,000
19. D Co makes a single product, the F, which is sold for $40 per unit. Annual fixed
costs are $192,000 and the F has a contribution to sales ratio of 40%. During
20X1, the actual revenue from sales of the F was 5560,000.
What is the margin of safety, in units, associated with sales of the F?
____units
Advice
The correct answer is: 2,000 units.
Contribution per unit
= selling price x C / S ratio
= $40 x 40%
= $16
Breakeven point
= fixed costs / contribution per unit
= $192,000/316 = 12,000 units
Units sold
= 3560,000/540
= 14,000 units.
Therefore the margin of safety
= 2,000 units.
20. The Finance Assistant from Castle Associates has recently returned from a
management accounting seminar at which she was introduced to some new
management accounting terms and formulae. She has now got several of the terms
and formulae mixed up in her mind.
The contribution required to breakeven is best given by which of the following
terms/formulae?
a. Unit selling price less unit variable cost.
b. Unit contribution x number of units sold.
c. Total fixed costs / C/S ratio.
d. Total fixed costs.
Advice
The correct answer is: Total fixed costs.

Contribution required to break even is the same value as total fixed costs.
Unit selling price less unit variable cost is the unit contribution.
Unit contribution x number of units sold is the total contribution.
Total fixed costs / C/S ratio provides the sales revenue at breakeven point.
21. Maker Co makes a single product, the Widget. This product sells for $10, and
makes a contribution of $5 per unit. Total fixed costs per annum are $16,148. If
Maker Co wishes to make an annual profit of $8,852, how many Widgets do they
need to sell?
Units required to be sold are____(to nearest unit)
Advice
The correct answer is: 5,000 units.
Sales units that will earn a required profit
= (fixed costs + required profit) / unit contribution
= ($16,148 + $8,852)/ $5
= 5,000
22. Which one of the following statements is incorrect?
a. In process costing, information is needed about work passing through a
process and work remaining in each process.
b. Job costs are collected separately, whereas process costs are averages.
c. In job costing, the progress of a job can be ascertained from materials
requisition notes and job tickets or time sheets.
d. In process costing, but not job costing, the cost of normal loss will be
incorporated into normal product costs.
Advice
The correct answer is: In process costing, but not job costing, the cost of normal
loss will be incorporated into normal product costs.
This statement is incorrect because the cost of normal loss will usually be
incorporated into job costs as well as into process costs. In process costing, this is
commonly done by not giving normal loss a cost, thereby leaving costs to be
shared between output, closing inventories and abnormal loss/gain. In job costing,
this can be done by adjusting direct materials costs to allow for normal wastage,
and direct labour costs for normal reworking of items or normal spoilage.
Job costs are collected separately, where as process costs are averages.
This statement is correct as job costs are identified with a particular job, whereas
process costs (of units produced and work in progress) are averages, based on
equivalent units of production.

In job costing, the progress of a job can be ascertained from materials requisition
notes and job tickets or time sheets.
This statement is correct. The direct cost of a job to date, excluding any direct
expenses, can be ascertained from materials requisition notes and job tickets or
time sheets.
In progress costing, information is needed about work passing through a process
and work remaining in each process.
This statement is correct because without data about units completed and units still
in process, losses and equivalent units of production cannot be calculated.
23. The following information relates to Job AAAA. which is being carried out by
Talybont Co in order to meet a customer's order.

Department A

Department B

Direct materials consumed

$5,000

S3,000

Direct labour hours worked

400 hrs

200 hrs

Direct labour rate per hour

S4

S5

Production overhead is absorbed at a rate of $4 per direct labour hour worked.

Administration overheads are 20% of the full production cost and the profit
margin for all jobs at Talybont Co is 30%. What is the selling price to the
customer for Job AAAA (to the nearest $)?
Selling price is $____(to the nearest $)
Advice
The correct answer is: $22,286 (to the nearest $)
Dept A

Dept B

Total

Direct materials

S5,000

S3,000

S8,000

Direct labour

S 1,600

S1.000

S2,600

Production overhead

S 1,600

S800

S2.400

Full production cost

If full production cost
Administration overhead
Total cost of Job AAAA

S13.000
= $13,000
= 20% x $13,000
= $2,600
= $13,000 + $2,600
= $15,600

Profit

= 30/70 x $15,600
= $6,686 (to the nearest $)
Selling price of Job AAAA
= Total cost of job + profit
= $15,600 + $6,686
= $22,286
24. Birchall White manufactures a certain product in two consecutive processes. Data
relating to Process 2 for July is given in the table shown below.
Process 1
Direct material input

2,000 units

Production cost

$46,080

Output to process 2

1,700 units

Inputs into Process 2 are transferred from Process 1. The expected loss in Process
2 is 5% of inputs, and all scrap units can be sold for $15 per unit. There was an
abnormal gain of 35 units. If there were no opening or closing work in progress
units, what was the total value of normal loss in Process 2 for July?
$____
Advice
The correct answer is: $1,275.
Normal loss
= 5% x 1,700 units
= 85 units
Normal loss is the loss expected in a process and it is not given a cost unless it has
a scrap value.
The total value of normal loss in Process 2 for July is therefore valued at the scrap
value of S15 per unit.
Scrap value of normal loss = 85 units x $15
= $1,275
25. A cake company uses process costing to account for costs. At the start of the new
year, there were no partially finished cakes but by the end of January, of the 5,000
cakes started, 300 cakes were only 80% complete. There were no losses expected
or experienced during the period and process costs were $5,681.
What is the value of closing work in progress at the end of January?
Closing work in progress is $____(to nearest $)
Advice
The correct answer is: $276 (to the nearest $).
Equivalent units of closing WIP
= 300 x 80%

= 240
Number of cakes stared and completed in January
= 5,000 -300
= 4,700
Total equivalent units
= 4,700 + 240
= 4,940
Cost per equivalent unit
= $5,681 / 4,940
= $1.15
Closing work in progress
= $1.15 * 240
= $276
26. Woodard Co employs a production line process to manufacture hardwood doors.
At the start of February, the company introduced materials costing $8,700. During
the month conversion costs totalled $3,800.
At the end of February, 900 doors were finished and 300 doors were held in
closing inventory.
Closing inventory is 100% complete as to materials, but only 60% complete as to
conversion costs.
What is the equivalent number of doors produced in February with repect to
conversion costs?
____doors with respect to conversion costs.
Advice
The correct answer is: 1,080 doors with respect to conversion costs.
Total
Materials
Conversion costs
Completed doors
900
(100%) 900
(100%) 900
Closing inventory
300
(100%) 300
(60%) 180
1,200
1,200
1,080
27. Which of the following statements best describes the difference between a byproduct and a joint product?
a. A by-product has a lower sales value compared to that of a joint product.
b. A by-product is only produced in small quantities whereas a joint product is
produced in large quantities.
c. A by-product has no sales value but a joint product can be sold at a profit.
d. A by-product can be identified from the start of a process, but a joint
product cannot be distinguished until the point of separation.
Advice
The correct answer is: A by-product has a lower sales value compared to that of a
joint product.

The volume of output for by-products is not necessarily lower than that of joint
products.
In process costing, none of the products can be identified until the point of
separation.
By-products do have a sales value and a joint product will not always necessarily
be sold at a profit.
28. Bell Co makes one product and uses process costing to account for costs. During
January, 10,000 units of material were input to the process at a cost of $20,000 and
conversion costs of $10,000 were incurred.
At the end of the period 8,500 units were transferred to finished goods, with the
remaining units being only 60% complete. There was no opening work in progress
for January and no losses were expected or experienced.
What was the value of closing work in progress shown in the process account (to
the nearest $)?
____(to the nearest $)
Advice
The correct answer is: $2,871 (to the nearest $).
Closing work in progress
= 10,000 units - 8,500 units
= 1,500 units
Fully completed units
= 8,500 equivalent units
Equivalent units in closing WIP
= 60% x 1,500
= 900
Total equivalent units
= 8,500 + 900
= 9,400
Total process costs
= $20,000 + 310,000
= $30,000
Cost per equivalent unit
= 330,000 / 9,400 units
= 33.19 per unit
Therefore the value of closing work in progress
= 900 x 33.19
= $2,871
29. A company has calculated its margin of safety to be 20% of budgeted sales.
Budgeted sales are 5,000 units per month and budgeted contribution is $25 per
unit.
What are the budgeted fixed costs per month?
$____
Advice
The correct answer is: $100,000.

Margin of safety
sales)/Budgeted sales x 100%
0.2
0.2x5,000
1,000
Breakeven sales

Breakeven sales volume

(Budgeted

sales

breakeven

= 20% or 0.2
= (5,000 - Breakeven sales)/5,000
= 5,000 - Breakeven sales
= 5,000 - Breakeven sales
= 5,000 - 1,000
= 4,000 units

= Total fixed costs/contribution per unit

= Total fixed costs/$25
4,000
= $4,000 x $25
Total fixed costs
= $100,000
30. F Scuttle Co has fixed costs of $50,000 per annum. The company sells a single
product for $25 per unit. The contribution to sales ratio is 40%.
What is the breakeven point in revenue?
Breakeven point at $____
Advice
The correct answer is: $125,000.
Breakeven point in units
= Fixed costs/contribution per unit
= $50,000 / ($25 x 0.4)
= 5,000.
Breakeven sales revenue
= 5,000 x $25
= $125,000
Alternatively, sales revenue at breakeven point = Fixed costs / CS ratio
= $50,000 / 0.4
= $125,000
31. When using a sequential process, any partly completed units at the end of a period
are, for cost calculation purposes, expressed as 'equivalent units'.
At the end of a period, 2,600 fully completed units were output from a process.
800 units were partly completed and the degrees of completion of this closing
work in progress were as follows.
Materials 85% complete Labour 60% complete Overheads 50% complete
Calculate the number of equivalent units of production____
Number of equivalent units with respect to materials____
Number of equivalent units with respect to labour____
Advice

The correct answers are:

Number of equivalent units with respect to materials: 3,280
Number of equivalent units with respect to labour:
3,080
Number of equivalent units with respect to overheads: 3,000
Materials:
Fully completed units
= 2,600 equivalent units
Equivalent units in closing WIP
= 85% x 800
= 680
Total equivalent units
= 2,600 + 680
= 3,280
Labour:
Fully completed units
= 2,600 equivalent units
Equivalent units in closing WIP
= 60% x 800
= 480
Total equivalent units
= 2,600 + 480 = 3,080
Overheads:
Fully completed units
= 2,600 equivalent units
Equivalent units in closing WIP
= 50% x 800
= 400
Total equivalent units

= 2,600 + 400
= 3,000
32. A company uses a discount rate of 14% per annum.
What is the present value of an $18,000 cash inflow to be received 4 years from
now?
a. $18,000/ 1.144
b. $18,000/(4x 1.14)
c. $18,000 (1.14 + 1.142+ 1.143+ 1.144)
d. $18,000 (1.144)
Advice
The correct answer is: S18,000 / 1.144.
The formula is
Present value = Sn/ (1 + r)n
Sn
= sum to be reinvested
r
= rate of return
n
= number of years
With data from the question we have

Present value $18,000/ 1.144.

33. An investor places $8,000 into an investment for 10 years.
The compound rate of interest earned is 8% for the first 4 years and 12% for the
last 6 years. At the end of the 10 years, the investment (to the nearest S) is worth?
Investment would be worth $____Please round to the nearest $
Advice
The correct answer is: $21,483.
We must use the formula
S = X(1+r)n
with a different number of years for each interest rate:
S = $8,000 (1+ 0.08)4 (1 + 0.12)6
= $8,000(1.3605)(1.9738)
= $21,483
34. Which of the following costs are relevant costs?
a. Sunk costs,
b. Avoidable costs,
c. Differential costs,
d. Opportunity costs.
Advice
The correct answers are: Avoidable costs; Differential costs; Opportunity costs.
Sunk costs are past costs which are not directly relevant in decision making.
Differential costs are the differences in total cost between alternatives, and are
classed as relevant costs in decision-making.
Avoidable costs are costs which would not be incurred if the activity to which they
relate did not exist. They are therefore classed as costs which are relevant in
decision making situations.
Opportunity costs are the values of the benefits sacrificed when one course of the
action is chosen in preference to an alternative. Opportunity costs are classed as
relevant costs in decision making.