Question

Shelby is considering whether to drop a product line from her business. Some administrative costs are being allocated to the product line but will not change in total if Shelby decides to drop the product line. Which of the following statements are true regarding these costs? (Check all that apply.)
a. Administrative costs are always irrelevant.
b. The allocated administrative costs are irrelevant to Shelby's decision to drop the product line.
c. The administrative costs are allocated costs.
d. Administrative costs are always relevant.

Answer 1

Answer:

D. Administrative costs are always relevant.

Explanation:

As Shelby is considering whether to drop a product line from her business. Some administrative costs are always being allocated to the product line but will not change in total if Shelby decides to drop the product line. Administrative costs are always relevant.  Administrative costs can be defined as the costs and expenses which are not directly related to any specific department like sales, manufacturing or marketing etc. These are the costs which are related to the company as a whole like, salaries of employees, expenses linked withe the general services like IT and accounting etc. These costs have no linkage with the gross margin. On the other hand, we can define a relevant cost that gives us a differences between two options and alternatives and it can be avoided by choosing one option over another. Therefore, Shelly should take this fact into account because administrative costs are very much relevant and important as well in order to make this particular decision about the product line.