ACCA Performance Management (F5) Certification Practice Exam

Regarding the relevant cost of an existing non-current asset, which is taken into consideration?

1. Lower of sales proceeds or lost contribution

2. Higher of sales proceeds or lost contribution from use in other departments

3. Only the original purchase cost

4. Future market value

The correct answer is: Higher of sales proceeds or lost contribution from use in other departments

When considering the relevant cost of an existing non-current asset, the correct approach is to assess what the asset could contribute in its alternative uses compared to its potential sale proceeds. Specifically, the relevant cost includes the higher of the sales proceeds or the lost contribution from utilizing the asset in other departments. This is because the relevant cost focuses on the opportunity cost associated with not using the asset in its best alternative function. If the asset can generate more value by being used in another department rather than being sold, that lost contribution represents a relevant cost. This reflects the concept of opportunity cost, which is central to decision-making in management accounting. Considering only the original purchase cost or the future market value does not encapsulate the full picture of what using or selling the asset could cost the organization in terms of foregone contributions. The value derived from an alternative use can be significantly more relevant for decision-making than static historical costs or predictions of future market prices. Thus, focusing on the potential lost contribution gives a clearer understanding of the asset's worth in the context of current business decisions.