If a Project Is Being Evaluated Three Years After It

question 191

Multiple Choice

If a project is being evaluated three years after it had started, how should the costs of the project from the three previous years be considered in deciding whether to continue the project?

• A)The costs should be incorporated as cash flows in evaluating whether the project should continue.
• B)These costs should not be included in the review of the project because the costs are sunk costs.
• C)These costs should be considered to demonstrate how much money the firm has already lost regardless of revenue.
• D)The previous costs and revenues should be incorporated into the cash flow stream in evaluating the future of the project.

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Definitions:

Efficiency Variance

The difference between the standard cost of labor or materials for actual production and the actual cost incurred, reflecting how efficiently resources are utilized.

Direct Labor-Hours

The total hours worked directly on the production of goods or delivery of services.

Variable Overhead

Costs that vary with production volume, such as supplies and utilities for manufacturing.

Rate Variance

The difference between the actual rate of expense or income and its expected (standard) rate, often used in variance analysis.