ACCA Performance Management (F5) Certification Practice Exam

Which type of cost should be given consideration in decision-making?

1. All past costs

2. Only cash flows that occur as a result of a decision

3. Future costs that are fixed

4. All variable costs regardless of context

The correct answer is: Only cash flows that occur as a result of a decision

In decision-making, it is crucial to focus on costs that will be directly affected by the specific decision at hand. This means considering only the cash flows that occur as a result of a decision, which includes relevant costs and benefits that will impact future performance. This approach ensures that the decision-maker is looking forward, rather than dwelling on historical costs or fixed costs that will not change with the decision. Giving weight to only past costs, which are known as sunk costs, is not effective since they cannot be altered and do not affect future cash flows. Similarly, while fixed costs are important for understanding the overall financial situation of a business, they are generally not relevant in a decision-making context unless they can change as a result of the decision. Looking exclusively at all variable costs, without considering their relevance to the decision at hand, could lead to overlooking important aspects that actually affect the decision's outcome. Hence, focusing only on future cash flows that arise from the decision is the most strategic approach.