Relevant cost refers to costs that will change depending on a specific business decision. It is crucial for decision-making as it helps management assess the financial impact of alternatives.
Relevant costs focus on future costs that differ between decision alternatives.
They help management analyze how different choices impact profitability.
This supports decision-making in areas such as pricing, outsourcing, and product discontinuation.
A. It explains the assumption that both costs and revenues are linear through the relevant range → Incorrect. While linear cost behavior is often assumed, it is not the primary purpose of relevant cost analysis.
B. It enables management to calculate a minimum number of units to produce and sell without having to incur a loss → Incorrect. This describes break-even analysis, not relevant cost analysis.
C. It enables management to predict how costs such as the depreciation of equipment will be affected by a change in business decisions → Incorrect. Depreciation is a sunk cost and is not considered relevant for decision-making.
The IIA’s Practice Guide: Financial Decision-Making and Internal Audit’s Role outlines how relevant cost analysis aids business strategy.
International Professional Practices Framework (IPPF) Standard 2120 states that internal auditors should assess management’s cost-analysis techniques.
Managerial Accounting Concepts (by IMA and COSO) emphasize relevant costs in strategic decision-making.
Why Option D is Correct?Explanation of the Other Options:IIA References & Best Practices:Thus, the correct answer is D. It enables management to make business decisions, as it explains the cost that will be incurred for a given course of action.
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