ACCA Financial Management (F9) Certification Practice Exam

What does 'non-relevant costs' encompass in financial analysis?

1. Future expected costs that can be avoided

2. Overheads that have no future financial impact

3. Cash inflows expected from investments

4. Future operational expenses

The correct answer is: Overheads that have no future financial impact

Non-relevant costs refer to expenses that should not influence decision-making in financial analysis because they do not affect future cash flows or economic outcomes. The concept primarily focuses on costs that have already been incurred or will not change regardless of the decision being considered. Selecting overheads that have no future financial impact as a representation of non-relevant costs is appropriate. Since these costs will not change due to future decisions, they do not provide useful information when evaluating options. For instance, if a company decides whether to pursue a new project or continue with an existing one, past overheads or fixed costs that remain unchanged regardless of the decision do not factor into the financial assessments. In contrast, future expected costs that can be avoided, cash inflows expected from investments, and future operational expenses are all relevant to decision-making. They directly impact future profitability and cash flow, thus playing a crucial role in assessing different alternatives or strategies. Understanding what constitutes non-relevant costs helps analysts focus on factors that truly affect financial outcomes, leading to more informed and effective decision-making.