(a) ‘Discretionary costs are troublesome because managers usually find it difficult to separate and quantify the results of their use in the business, as compared with variable and other fixed costs.’

You are required to discuss the above statement and include in your answer the meaning of discretionary costs, variable costs and fixed costs; give two illustrations of each of these three named costs. (12 marks)

(b) A drug company has initiated a research project which is intended to develop a new product. Expenditures to date on this particular research total £500 000 but it is now estimated that a further £200000 will need to be spent before the product can be marketed. Over the estimated life of the product the profit potential has a net present value of £350 000.

You are required to advise management whether they should continue or abandon the project. Support your conclusion with a numerate statement and state what kind of cost is the

£500 000. (5 marks)

(c) Opportunity costs and notional costs are not recognized by financial accounting systems but need to be considered in many decisions taken by management. You are required to explain briefly the meanings of opportunity costs and notional costs;

give two examples of each to illustrate the meanings you have attached to them.

(8 marks)

(Total 25 marks)

CIMA Stage 2 Cost Accounting LO1