A future, incremental cash flow arising as a direct consequence of a decision is called which cost?

A future, incremental cash flow arising as a direct consequence of a decision is called which cost?

• A. Relevant cost
• B. Incremental cost
• C. Controllable cost
• D. Uncontrollable cost

Answer: (A)

The idea is to focus on costs that will actually change because of a decision and that occur in the future. These are relevant costs—the costs and benefits that matter when comparing alternatives. A future cash flow that is incremental and arises directly from choosing one option over another fits this perfectly. It will be different under different choices, so it can affect the decision, and since it occurs in the future it isn’t a sunk cost or something that won’t change with the decision. That’s why it’s labeled a relevant cost. Controllable or uncontrollable costs are about whether management can influence the cost, not about whether the cost will differ between options. Incremental cost describes the change itself, which is related, but the standard decision-making label used here is relevant cost.

The idea is to focus on costs that will actually change because of a decision and that occur in the future. These are relevant costs—the costs and benefits that matter when comparing alternatives.

A future cash flow that is incremental and arises directly from choosing one option over another fits this perfectly. It will be different under different choices, so it can affect the decision, and since it occurs in the future it isn’t a sunk cost or something that won’t change with the decision. That’s why it’s labeled a relevant cost.

Controllable or uncontrollable costs are about whether management can influence the cost, not about whether the cost will differ between options. Incremental cost describes the change itself, which is related, but the standard decision-making label used here is relevant cost.