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hello sir could you please help me understand and solve the following qn. i tried but i was unable to understand the soln( its a qn from bpp kit):
The following info is available for identifying the relevant cost of materials for a job for a customer. the companies management wants to wants to establish a minimum price at which it is prepared to take on the job.
MATERIAL W:
Total quantity required (KG) – 500
Currently in inventory(KG) – 0
Carrying value ($ PER KG) – 0
Realisable value per kg – 0
Replacement cost per kg($) – 8MATERIAL X:
Total quantity required (KG) – 500
Currently in inventory(KG) – 300
Carrying value ($ PER KG) – 5
Realisable value per kg – 3
Replacement cost per kg($) – 7MATERIAL Y:
Total quantity required (KG) – 500
Currently in inventory(KG) – 400
Carrying value ($ PER KG) – 8
Realisable value per kg – 9
Replacement cost per kg($) – 11MATERIAL Z:
Total quantity required (KG) – 100
Currently in inventory(KG) – 100
Carrying value ($ PER KG) – 10
Realisable value per kg – 12
Replacement cost per kg($) – 15Material Y is in regular use by the company. Materials X and Z are no longer in regular use. There is no alternative use for Material X but the 100 kg of Material Z could be used instead of 150 kg of Material V on a different job. Material V costs $9 per kg and there is currently none of this material in inventory.
What is the relevant cost of these materials for the job under consideration?
A. $10,850
B. $11,350
C. $12,200
D. $12,350the answer bpp gave was D as follows:
Material W 500 kg × $8 4,000
Material X 500 kg × $3 1,500
Material Y 500 kg × $11 5,500
Material Z Higher of (100 × $12) and (150 × $9) 1,350
12,350Have you watched the free lectures on this? Because apart from one of the materials, the ‘rules’ are all explained in detail in the lectures.
The exception is material X, where BPP have made a mistake.
500 Kg is needed but there is only 300Kg in inventory. So the extra 200Kg has to be bought specially and costs 200 x $7. The 300 Kg that is in inventory is no longer in regular use and so the cost of using this is the lost scrap value, which is 300 x $9.
So the total cost of material X for the job is 1400 + 2700 = $4,100.thanks for your reply. i have gone through the lecture but this qn looks quite complicated. i have understood material W as it will only be on replacement cost. but i dint get how u got 9$ as cost of lost scrap for material X . And also i did not understand for material Z and y how bpp arrived to that?
please explain john
Sorry – I typed too quick for material X.
The lost scrap value is $3 (not $9) and so the total cost is 1400 + (300 x 3).With regard to Z, if the job under consideration did not exist, then for the different job they could either buy V (150 kg x $9) or they could use Z (100 kg x $12 (lost scrap)) and so they would prefer to use Z because it would cost them less.
So, if Z is used for this job under consideration, they will not be able to use it for the other job and would therefore have to buy V and pay out 150 x 9 = $1350. So this is the cost of taking Z for the job under consideration.
thanks alot john. i really appreciate your support. i have understood your explanation. its actually common sense which didn’t click on me earlier but now it’s clear 🙂
i wonder why bpp makes mistakes. they will simply confuse students.
just to ask if you know, does the f5 bpp kit have many mistakes in their solutions or just few of them?
you had mentioned something about the “errata sheet” earlier somewhere in the forums, saying that is the place where you can check where they have mentioned about their errors. where can i find that place?
There are a few mistakes (although not so many), and it is not only BPP – Kaplan has some mistakes in their books as well 🙁
Nobody is perfect and we sometimes make mistakes, although we are able to correct them immediately whereas BPP and Kaplan only reprint the books once a year.
In the front of your Revision Kit should be details of how to log on to their website, and as far as I know there is an errata sheet on their website.
Sir, could you help me with this question?
A company wants to decide whether to make its materials inhouse or to subcontract production to an external supplier. In the past it has made 4 materials inhouse, but demand in the next year will exceed the in-house production capacity of 8000 units. All four materials are made on the same machines and require the same machine time per unit : machine time is limiting production factor.
the following information is availableMaterial W X Y Z
Units required 4000 2000 3000 4000Variable cost $8 Per unit $12 per unit $9 per unit $10 per unit
of inhouseDirectly attributable $5000 $8000 $6000 $7000
fixed cost exp.Cost of external $9 per unit $18 per unit $12 per unit $12 per unit
purchaseDirectly attributable fixed costs are fixed cash expenditures that would be saved if production of the material of the material inhouse has stopped completely
If a decision is made entirely on the basis of short term cost considerations, what materials should the company purchase externally.
A-4000 units of W and 1000 units of Z(according to me)
B-4000 units of W and 4000 units of Z(according to BPP Revision Kit)
C-3000 units of Y and 2000 units of Z
D-1000 units of Y and 4000 units of ZAs I rank the materials to be purchased externally, sub-contracting w is cheaper by $1000. Second rank is given to material z where additional cost is 1000 and similarly 3rd rank is Y and the last rank is X
Since the capacity is 8000 units first priority to produce inhouse is X which is 2000 units next priority is given to Y which is 3000 units. The company still has the capacity to produce 3000 units of Z and sub-contract 1000 unitsPlease Help
Hemraj:
Assuming that you have copied the question correctly, then your answer (A) is correct.
the explanation for the answer is :
It would save $1000 in cash to buy W externally. If full production can be achieved for the other materials only W would be purchased externally. However, there is insufficient capacity to produce all 3 materials in-house
Only 8000 units can be produced in-house. If all the requirement for W is purchased externally (4000 units) at least 1000 units of X,Y or Z must be purchased externally too. the additional cost of buying Z externally is the least of these 3
(The part that I don’t understand is )
If in-house production of material Z is reduced to 3000 units, the additional cost of external purchase would only be $6000, so that $1000 could be saved by purchasing all of Z externally
Please advice
Oops – I (and you 🙂 ) have made a mistake and BPP are correct. I am sorry!
The point is that if we do just buy 1,000 of Z externally and produce the rest ourselves, then we still have all of the directly attributable fixed costs for Z of $7,000.
So with regard to the 3,000 that we could still produce ourselves, if instead we both the 3,000 externally then it would cost an extra 3,000 x (12 – 10) = 6,000, but we would save the fixed costs of $7,000.
Therefore it is better to buy these 3,000 externally as well – so a total of 4,000 externally.I do apologise (my excuse is that i was tired – it was late here when I answered before 🙂 )
Thank you for your explanation.
Just wanted to say that opentuition has helped me a lot.
Thanks again 🙂
Sir, this is part of the question Ennerdale from BPP exam kit:
Labour
the contract requires 800 hours of skilled labour. they are paid at $9.5 per hour. There is shortage of skilled labour and all available skilled labour is fully employed in manufacturing product PThe following information is available regarding product P
Selling price $100
Skilled labour ($38)
Other variable overheads ($22)
Contribution $40Required
what is the relevant cost?My question is that do we add variable overheads in this calculation?
and in which situations do we add variable overheads added?If labour is in short supply, then the relevant cost is always the cost of labour plus the lost contribution. (For explanation as to why you need to watch the lectures on Relevant Costs.)
In this question, for product P the labour + lost contribution = 38 + 40 = $78.
Since each unit takes 4 hours (38/9.50), the relevant cost per hour = 78/4 = $19.50
So the 800 hours needed have a relevant cost of 800 x 19.50 = $15,600.
Cost other than labour are of no relevance (except insofar as they are needed to calculate the lost contribution).
But sir there was this mcq questionn:
In a manufacturing plant,the workforce is operating at full capacity. the workforce is paid at the rate of $12 per hour for 35 hour week. this is a weekly fixed wage, although a customer has asked for a special job to be done that would involve taking employees off the regular work that EARNS A CONTRIBUTION OF $15 AFTER ALLOWING FOR DIRECT LABOUR AND VARIABLE OVERHEADS OF $2 PER HOUR. The special job would take 10 hours of labour time.
What is the relevant cost of labour?
A- $150
B- $170
C- $270
D- $290 The answer in BPP exam kitThe explanation says that the contribution is after deducting labour cost and variable overheads so these are relevant cost ( including variable overheads )
There is a similar example in the text book also.
Also the contribution is always arrived at after deducting variable costs
Please advice
That is precisely what I wrote in my previous reply.
Read the last sentence of my previous reply. The contribution is relevant, costs other than labour are not relevant costs themselves – they are only needed to calculate the contribution.
Contribution is always calculated by subtracting all variable costs from the revenue !
Again I really do suggest that you watch the lecture.
So in the MCQ,
Why is the variable cost included in relevant cost as it clearly says that the contribution of 15 is after deducting variable cost of 2 per hour and labour costs?
We have the contribution figure of $15
Since the contribution is given there is no need to calculate lost contribution.
The contribution is given in both the questions as well as variable overheads.
So why is variable overheads taken in relevant costing in one and ignored in other?I am really sorry, I am struggling to understand the logic here.
I have to apologise again, because I did not read carefully enough. (The problem is that because I teach several papers I am answering around 100 questions a day at the moment in my spare time from work, although I appreciate that is not much of an excuse 🙁 )
The BPP answer is correct, and it is because the variable overheads are being charged per hour.
You have not answered as to whether you actually have watched the lecture, but here is an illustration that might help you.
Suppose labour is current being used making another product which takes one hour to produce and has the following:
Revenue per unit: 100
Materials: 50
Labour (at 10 per hour) 10
Var o/hs (at 5 per hour) 5
Therefore contribution of $35 per unitIf the labour is taken away and used on another project, then the labour and variable overheads will (in total) stay the same because they will still have to be paid.
However, the revenue from the other product will be lost. Also, the materials from the other product will be lost as well.
So what they will lose is 100 – 50 = $50 per hour.This is the same as the lost contribution of 35 plus the labour (10) and the variable overheads (5).
So, again, the BPP answer is correct. However it is unusual in the exam for variable overheads to be mentioned on an hourly basis – usually this is not the case in which case it is just the labour cost plus the lost contribution.
Ooh. Now I understand.
Thank you for explaining in such a simple way
And yes I have watched your lecture on relevant costing. Its the best way to explain the whole chapter but I couldn’t find the answer for which I was looking for.
Thanks
Hi John,
The management accountant of a company has prepared a preform for a minimum tender price the cost in profit Ma is 2m and in notes it says. In case of labour. If the contract was lose the. All of the current staff would me made redundant . Labour is at full capacity. Redundancy cost are estimated to be $50000 now or 60,000 in one year time which one is a relevant cost to be considered as a relevant cost.
Secondly if the current contract is lost then machinery sold for 6000 now or 4500 in one year which one is relevant to the decision and do we add the machine cost as a positive number or negative?
Thanks
NoureenIt is impossible for me to answer about whether to take the amount now or in 1 years time, without seeing the whole of the question.
With regard to the machinery, then the sale proceeds are a cost (and opportunity cost) but again, I can’t say which one to use without seeing the whole question.
What puzzles me a bit is that presumably you have an answer in the same book as the question, in which case does the answer not explain the reasons for choosing the figures that they have taken?
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