Question

Select either true or false for the following statements

  

1.	An opportunity cost is the potential benefit that is lost by taking a specific action when two or more alternative choices are available.	(Click to select)FalseTrue
2.	A sunk cost will change with a future course of action.	(Click to select)TrueFalse
3.	An out-of-pocket cost requires a current and/or future outlay of cash.	(Click to select)FalseTrue
4.	Relevant costs are also known as unavoidable costs.	(Click to select)FalseTrue
5.	Incremental costs are also known as differential costs.	(Click to select)TrueFalse

Answer 1

1.

True

Opportunity cost is the benefit foregone for undertaking an alternative scope of action. Suppose there are 4 alternatives --- P, Q, R, and S; only R is undertaken out of the lot; then the next best alternative should be identified for getting the highest-value, which would be the opportunity cost of R.

2.

False

Sunk cost is a past cost that is irrelevant for any future act, because this is unchanged. An example is the cost of land ($5,000) that is purchased 50 years ago.

3.

True

Such cost reduces cash; therefore, there is a cash outflow. An example is salary expense; it needs to be paid in cash at present or in future.

4.

False

The cost which is relevant must be avoidable. An example is direct material cost; this is relevant, if the product is not made but bought; an allocated factory overhead is not relevant, since this is unavoidable either of making or buying.

5.

True

Both have the same meaning, because both give difference in cost between alternatives.