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(i) They are future costs – A decision is always about the future and may not change what has been done. A cost induced in the past is totally irrelevant to any decision being made now e.g. sunk costs, committed costs.
(ii) They are cash flows. It is assumed that decisions are taken that will maximize the satisfaction of the company’s owners and therefore such decisions must change the net cashflows. Costs that do not reflect additional cash outflows should be ignored in decision making process.
(iii) They should be incremental - arise as a direct consequence of a decision i.e the differential costs if the decision is “undertaken” and if it is “not undertaken”.
Titany answered the question on October 12, 2021 at 05:39
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