ACCA Performance Management (F5) Certification Practice Exam

Which of the following items is NOT considered relevant?

1. Depreciation, as it is not cash flow

2. Future projected revenues

3. Market value of the asset

4. Current operational costs

The correct answer is: Depreciation, as it is not cash flow

Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life, which means that while it is a recognized expense, it does not involve an actual cash outflow during the current period. In performance management and decision-making contexts, relevant costs typically include both future incremental cash flows and costs that will differ between decisions. Since depreciation does not vary with the decision at hand and does not represent an additional cash expense, it is classified as irrelevant when determining the net economic impact of decisions. On the other hand, future projected revenues are vital for assessing potential profitability and guiding strategic decisions, as they represent the cash inflows expected from a proposed action. The market value of an asset is also relevant because it can influence decisions regarding selling or investing in that asset. Current operational costs matter as well, since they directly impact ongoing cash flows and can change based on different managerial choices. Hence, understanding careful distinctions about what constitutes relevant versus irrelevant costs is crucial in effective decision-making and resource allocation.