A company accepts a special order using spare production capacity. Which cost is most important in deciding whether to accept it?
Correct answer: C. The additional cost caused by the order
- A. The historical cost of the factory
- B. The allocated head-office rent
- C. The additional cost caused by the order
- D. The book value of existing equipment
Explanation
With spare capacity, the decision should focus on the incremental costs and revenues created by the order. Historical costs and unavoidable allocated costs do not change because of acceptance.
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About Cost Accounting
Cost accounting measures and analyses the cost of producing goods or providing services for planning, control and pricing decisions. It covers direct and indirect costs, fixed and variable costs, job and process costing, break-even analysis, marginal costing, overhead allocation, and the difference between product cost and period cost.
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