Economics · Cost Accounting Principles
Consider the following statements regarding cost accounting and inventory management: Statement 1: The Principle of Conservatism dictates that all foreseeable losses should be recorded immediately, while potential gains are ignored until realized. Statement 2: Under the Weighted Average Cost (WAC) method, the cost of items issued is determined by dividing the total cost of goods available by total units available. Statement 3: A 'Sunk Cost' is a past expenditure already incurred that cannot be recovered, making it irrelevant for prospective decisions. Statement 4: 'Opportunity Cost' represents the potential benefit forfeited when one alternative is chosen over another. Statement 5: In 'Process Costing', the cost of each production stage is accumulated and assigned to units passing through it, suitable for homogeneous products like chemicals. Statement 6: 'Joint Products' are two or more products generated from a single raw material up to a specific 'Split-off Point'. Statement 7: 'Economic Value Added' (EVA) calculates economic profit by subtracting the cost of all capital from net operating profit after taxes. Based on these principles, which of the following scenarios describes a correct application?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
- 1A retailer switches from FIFO to Statement 2 during a period of rapidly falling prices to ensure that the reported net profit is as high as possible.
- 2A bank ignores the potential interest income from an alternative investment when deciding to purchase a new office building, as per Statement 4.
- 3A chemical plant uses Statement 5 and Statement 6 to allocate common costs up to the split-off point based on the physical weight of outputs to determine the inventory value of joint products.✓
- 4A manager decides to continue a failing project because ₹5,000,000 has already been spent on it, citing Statement 3 as a reason to treat the expenditure as an asset.
Correct answer
A chemical plant uses Statement 5 and Statement 6 to allocate common costs up to the split-off point based on the physical weight of outputs to determine the inventory value of joint products.
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