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Dear Tutor. While doing questions in BPP on investment appraisal I came across several questions on relevant cost and differential cost. And It’s not on neither the lecture video nor the lecture note. Can you help me please.
Refer me to the specific questions and then I will explain.
All that is mean by ‘relevant cost’ is the relevant amount to be included in the cash flows. All that is mean by the ‘differential cost’ is the incremental (or extra) cost involved.Here is the question
13.2 In decision making, costs which need to be considered are said to be relevant costs. Required Which of the following are characteristics associated with relevant costs? (1) Future costs
(2) Unavoidable costs
(3) Incremental costs
(4) Differential costsO (3) only
O (1) and (2) only
O (1), (3) and (4) only
O All of them 0The answer is C.
Future costs are obviously relevant to making any decision.
Unavoidable costs are not relevant. If they are unavoidable then they will be incurred whatever decision is made.
Incremental costs are extra costs and are relevant to decisions.
Differential costs are relevant when there are two alternative courses of action and are the difference between the costs of the two alternatives. (If the decision is whether or not to do one course of action then they are the incremental costs)
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