ACCA Performance Management (F5) Certification Practice Exam

Which cost type is always ignored according to the incremental approach?

1. Future cash inflows

2. Committed costs that are unavoidable

3. Fixed costs that are not relevant

4. Variable costs that can be modified

The correct answer is: Fixed costs that are not relevant

The incremental approach focuses on the costs and revenues that will change as a result of a specific decision, emphasizing the relevance of those financial elements that will be affected by the decision at hand. Always ignored in this approach are committed costs that are unavoidable since they cannot be changed regardless of the decision made. When we talk about fixed costs that are not relevant, it is essential to understand that these costs have been incurred and will remain unchanged irrespective of the decision. These costs do not vary with the choice at hand and therefore do not impact the incremental cash flows resulting from a new project or decision. The incremental analysis primarily deals with additional costs that can be avoided (incremental costs) or those that will be incurred if a particular decision is taken. In contrast, future cash inflows are necessary to consider because they can provide the necessary context for evaluating the benefits of a decision. Similarly, variable costs which can be modified are relevant because they can influence the overall outcome of the decision. Committed costs that are unavoidable, however, will remain the same regardless of the decision made, which is why they are ignored in this analytical approach.