Question

5. Relevant to Cost Accounting, briefly explain the following terms: (a) Sunk cost (b) Opportunity cost (c) Relevant cost (2 marks

Answer 1

A .

Sunk cost is a cost that an entity has incurred, and which it can no longer recover. Sunk costs should not be considered when making the decision to continue investing in an ongoing project, since these costs cannot be recovered.

B.

A benefit, profit, or value of something that must be given up to acquire or achieve something else. Since every resource (land, money, time, etc.) can be put to alternative uses, every action, choice, or decision has an associated opportunity cost.

C.

Relevant cost is a managerial accounting term that describes avoidable costs that are incurred when making business decisions.As an example, relevant cost is used to determine whether to sell or keep a business unit.