ACCA Performance Management (F5) Certification Practice Exam

Is historical cost considered relevant in decision making?

1. Yes, it is crucial for future decisions

2. No, historical cost is always regarded as a sunk cost

3. Only when evaluating long-term investments

4. Yes, but only for fixed assets

The correct answer is: No, historical cost is always regarded as a sunk cost

Historical cost is primarily regarded as a sunk cost, which means it represents expenses that have already been incurred and cannot be recovered. In decision-making contexts, relevance is typically associated with costs that will affect future cash flows, which makes past expenditures, like historical costs, less significant. Since historical costs do not change regardless of future decisions, they do not influence the current managerial decisions regarding resource allocation or project selection. In decision-making, emphasis is placed on costs that can be avoided or altered moving forward. As such, recognizing historical costs as sunk costs helps managers focus on costs that will be incurred going forward or on any existing costs that remain relevant to future actions. Therefore, while historical costs have their role in accounting and offer a record of what has been spent, they are not directly relevant for future decision-making as they do not assist in comparing future alternatives or optimizing new strategies. The other options suggest different levels of relevance that do not accurately reflect the concept of sunk costs and the role of historical costs in managing current decision-making situations.