CMA USA Part2 section-C
Decision analysis:
Step-2. marginal analysis:
1. Sunk cost :
It is also called historical cost or past cost.
It is the cost that is already paid or spent end that Is not
relevant in decision making.
2. Avoidable cost:
It is a cost that can be avoided if a particular alternative
is selected.
It is relevant in decision-making.
3. Unavoidable cost:
It is a cost that cannot be avoidable if a particular
alternative is selected.
It is not relevant in decision-making.
4. Economic cost:
Economic cost = explicit cost + implicit cost
5. Explicit cost :
it is also called out-of-pocket costIt involves cash payment and its record on
accounting books.
Example: salary paid, rent paid, etc.
It is also relevant.
6. Implicit cost/ imputed cost :
It does not involve any cash payment and is not recorded on
accounting books
Example: opportunity cost
It is relevant in decision-making.
7. Opportunity cost :
It is the next best alternative that is given up
It is relevant in decision making
It is a contribution to income that is gone by not using limited resources for its best alternative use.
Note: the relevance of a particular cost to a decision is
determined by the potential effect on decision-making.
8. Discreationary cost:
It is the cost that can be spent at the discretion of
management.
Eg: advertisement cost, employee training cost, and research
and development cost, etc.
9. Marginal cost/ additional/ incremental :
It is an additional cost to produce additional units.
10. Marginal revenue:
It is additional revenue from the selling of additional units.
11. Marginal profit:
Marginal profit= marginal revenue- marginal cost
Example:
Marginal revenue$100
Marginal cost $30
=Marginal profit= $70
12. Total cost :
Total cost = total fixed cost+ total variable cost