F2: SAMPLE QUESTION 4
Which TWO of the following statements relating to relevant cost concepts in decision making are correct?
(1) Materials can never have an opportunity cost whereas labour can
(2) The annual depreciation charge is not a relevant cost
(3) Fixed costs would have a relevant cost element if a decision causes a change in their total expenditure
(4) Materials already held in inventory never contribute to relevant cost
A 1 and 3
B 1 and 4
C 2 and 3
D 3 and 4
Solution:
In this case, a little thought will confirm that statement 1 is incorrect. Thorough preparation will mean that you know that materials can often have an opportunity cost. Once this decision has been made, choices A, and B can be eliminated, leaving either C or D as the correct choice. As statement 3 in included in both of these choices, it does not need to be considered. The question now requires a decision on whether choice 2 or choice 4 is correct.
Both of these relate to issues in which many candidates experience difficulty. How a particular candidate will progress from this point will depend on the knowledge they have brought into the exam as this will be the basis of their decision regarding statements 3 and 4.
Let's consider statement 3 first. The key issue is that a cost is relevant if the decision leads to a future incremental cash flow. Statement 3 effectively says this in the phrase 'a change in their total expenditure'. A candidate who recognises this will thus select choice C - if they are confident about their understanding of statement 3. If there is any doubt, or to provide reassurance, statement 4 can then be considered.
In this case, well-prepared candidates will recognise that if materials already held in inventory can be sold, using them will have a relevant cost - the benefit foregone by using them rather than selling them. Thus statement 4 is incorrect and choice 3 is the correct answer.
