Asked by Taylor Johnson on May 26, 2024
Verified
When excess capacity exists, the only relevant cost associated with a special order will usually be which cost?
A) Fixed cost
B) Variable cost
C) Administrative cost
D) Allocated fixed cost
Excess Capacity
The availability of more production capacity within a business than is currently needed to meet demand.
Special Order
An order for a product or service that is outside the company's normal scope of work, often requiring a unique set of costs and pricing.
Relevant Cost
Costs that are directly related to a specific business decision, affecting the future cash flows.
- Identify and apply the relevant costs in special order decisions, including the role of excess capacity.
Verified Answer
AA
Azira AzmanMay 31, 2024
Final Answer :
B
Explanation :
When excess capacity exists, the fixed costs have already been incurred and do not need to be considered in the decision-making process. The variable costs would be the only relevant cost associated with a special order, since they would be directly impacted by the production of the additional units. Administrative costs and allocated fixed costs would not be relevant to the decision as they would not be affected by the special order.
Learning Objectives
- Identify and apply the relevant costs in special order decisions, including the role of excess capacity.