CAF-5 · Chapter 14
Relevant Costs MCQs with Answers
10 multiple-choice questions on Relevant Costs for CAF-5 Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
According to the principles of decision-making, which of the following best defines a "Relevant Cost"?
- A) A past cost that has already been incurred and recorded in the financial statements.
- B) A future cash flow arising as a direct consequence of a decision.
- C) A non-cash expense such as depreciation or amortization.
- D) A general fixed overhead that is apportioned to all departments.
Show answer & explanation
Answer: B) A future cash flow arising as a direct consequence of a decision.
The study text clearly defines a relevant cost as a future cash flow that arises as a direct consequence of a specific decision. Past (sunk) costs, non-cash items, and committed costs are not relevant.
Question 2
In relevant costing, what term is used to describe "a benefit that will be lost by taking a specific course of action"?
- A) Sunk cost
- B) Avoidable cost
- C) Incremental cost
- D) Opportunity cost
Show answer & explanation
Answer: D) Opportunity cost
An opportunity cost is the value of a benefit sacrificed or lost when one course of action is chosen over the next best alternative. It is a critical component of relevant costing.
Question 3
A company has 1,000 kg of Material X in inventory, which was purchased last year for Rs. 50 per kg. This material is in continuous and regular use by the company. If Material X is used for a new special one-off contract, what is its relevant cost per unit?
- A) The original purchase price of Rs. 50 per kg.
- B) The current replacement cost of purchasing new material from the market.
- C) The current disposal/scrap value of the material.
- D) Nil, because the material is already owned and paid for.
Show answer & explanation
Answer: B) The current replacement cost of purchasing new material from the market.
When a material is in continuous/regular use, any units taken from inventory for a special job will simply have to be replaced to meet the ongoing regular demand. Therefore, the relevant cost is the current replacement price.
Question 4
A specific job requires 50 kg of a special material, "Wire-D". The supplier only sells this material in minimum batch sizes of 60 kg at a price of Rs. 10 per kg. The remaining 10 kg will have no alternative use for the company and cannot be sold for scrap. What is the relevant cost of this material for the special job?
- A) Rs. 500
- B) Rs. 600
- C) Rs. 100
- D) Rs. 0
Show answer & explanation
Answer: B) Rs. 600
The supplier mandates a minimum order of 60 kg. Since the remaining 10 kg has no alternative use or scrap value, the entire cash outflow caused by the decision to accept the job is the cost of the full 60 kg (60 kg × Rs. 10 = Rs. 600).
Question 5
A new contract requires 200 hours of direct labour in Department 1. The workforce in this department is paid a fixed weekly wage of Rs. 16 per hour. Currently, Department 1 has spare labour capacity (idle time) and there are no plans to lay off any workers. What is the relevant cost of labour for this contract in Department 1?
- A) Rs. 3,200
- B) Rs. 0
- C) Rs. 1,600
- D) Rs. 4,800
Show answer & explanation
Answer: B) Rs. 0
The workers are paid a fixed wage regardless of whether they are working or idle. Because the department has spare capacity, putting them to work on the new contract incurs no additional cash flow. Thus, the relevant cost is zero.
Question 6
A special order requires 900 hours of labour. The factory is working at full capacity. To complete the order, management must divert workers from their normal regular production. For regular production, workers are paid Rs. 15 per hour and generate a contribution margin of Rs. 5 per hour. What is the relevant opportunity cost per hour of diverting these workers to the special order?
- A) Rs. 5 per hour
- B) Rs. 15 per hour
- C) Rs. 20 per hour
- D) Rs. 10 per hour
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Answer: C) Rs. 20 per hour
When labour is at full capacity and must be diverted from other work, the company loses the contribution from that regular work (Rs. 5) AND still has to pay the workers for their time (Rs. 15). The total opportunity cost is Rs. 15 + Rs. 5 = Rs. 20 per hour.
Question 7
Which of the following costs should ALWAYS be treated as irrelevant when evaluating a short-term pricing decision for a special order?
- A) Variable production overheads
- B) Incremental material costs
- C) Sunk costs and absorbed general fixed overheads
- D) Specific fixed costs incurred solely for the special order
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Answer: C) Sunk costs and absorbed general fixed overheads
Sunk costs are past costs that cannot be changed. Absorbed general fixed overheads are arbitrary allocations of costs that will be incurred regardless of the decision. Both are completely irrelevant to short-term decision making.
Question 8
A company holds raw materials in inventory that are no longer in regular use. The material can be sold for a scrap value of Rs. 1.50 per kg. Alternatively, it can be modified and used as a substitute for another material on a different project, saving the company Rs. 2.00 per kg. If the material is used on a new special contract, what is its relevant cost?
- A) Rs. 1.50 per kg
- B) Rs. 2.00 per kg
- C) Rs. 3.50 per kg
- D) Rs. 0.50 per kg
Show answer & explanation
Answer: B) Rs. 2.00 per kg
When a material is no longer in regular use, its relevant cost is the highest alternative value the company could obtain from it. It can either be sold for Rs. 1.50 or used to save Rs. 2.00. Since Rs. 2.00 is the higher benefit being sacrificed by using it on the new contract, Rs. 2.00 is the relevant cost.
Question 9
A technical advisor is paid Rs. 400 per hour. He is currently working at full capacity. If the company accepts a new contract, he will need to dedicate 8 hours to it. Since he cannot be diverted from his regular work, he will have to work overtime to complete the new contract, for which he is paid a 50% premium above his usual rate. What is the total relevant cost of his time for the new contract?
- A) Rs. 3,200
- B) Rs. 1,600
- C) Rs. 4,800
- D) Rs. 0
Show answer & explanation
Answer: C) Rs. 4,800
The advisor's normal rate is Rs. 400. With a 50% premium, the overtime rate is Rs. 600 per hour (400 + 200). Since 8 hours are required, the incremental cash outflow is 8 hours × Rs. 600 = Rs. 4,800.
Question 10
When evaluating whether to make a component in-house or buy it from an external supplier (Make or Buy decision), which of the following costs represents an "avoidable cost" that is relevant to the decision?
- A) The depreciation on the factory building.
- B) The general head office administrative salaries apportioned to the factory.
- C) The variable manufacturing costs and specific fixed overheads that would be saved if production is stopped.
- D) The original cost of the machinery used to make the component.
Show answer & explanation
Answer: C) The variable manufacturing costs and specific fixed overheads that would be saved if production is stopped.
Avoidable costs are costs that can be saved if a particular activity is discontinued. In a make-or-buy decision, the relevant costs of making the item are the variable costs and specific fixed costs that the company will avoid if it chooses to buy externally.