10. For a cost to be relevant, what two things must exist? 1. __________________

Question

10. For a cost to be relevant, what two things must exist?

1. _____________________________________________________________________________

2. _____________________________________________________________________________

Is depreciation a relevant cost when considering whether to eliminate a segment and why?

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Explanation / Answer

1. -For a cost to be relevant, Cost should be applied for the future. Sunk Costs are irrelevent because it has been already incurred. Costs that change in the future as a result of a managerial decision.

- Cost should be incrementel: Cost that are incurred are based on decisions whether the decision has been taken or not. Hence it should be incrementel .

2. Depreciation is an irreelevent cost since it has no say nor impact the cash flows. Depreciation is an non cash item . It does not create any difference on cost of a product. Managerial decisons are not based upon Depreciation . Hence it is not relvent to a decision.

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