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Hi John, thank you for the lectures. I hope you don’t mind but i was doing a past paper question and it included a figure for opportunity costs, however it was not included in the calculation for the answer. Why don’t we include opportunity costs in life cycle calculations?
Thanks again you’re a true star!
There is not a rule about this – it very much depends on the wording of the question.
Hi Sir, I am not sure about when to include/exclude Opportunity costs in Lifecycle calculations. What kind of wording in the question requires to include Opportunity costs in the Lifecycle calculation? (borrowing cost of money, investment opportunity in another project)
Thanks
You would normally include opportunity costs. Better is if you give an example of a past exam question that is confusing you and then I can explain properly.
Sir, question 3 in past paper June 2016. It says that “having spent time on development of a new product, the Company missed out on the opportunity of earning an estimated $800000 contribution from the sale of another product”.
In the answer provided they ignore the opportunity cost, saying that the calculation is done using Lifecycle costing NOT Relevant Costing.
Sir, as you mentioned above that normally Opportuinity Costs are included, I don’t understand why they ignored it by explaining that it is a Lifecycle Costing question NOT Relevant Costing!!
Thanks
I think that the examiner could have explained it a bit better, even though her answer is correct.
Had they been needing to make a decision about whether or not to go ahead with the new product, then certainly the lost contribution would have been included.
However, the decision has been made – they are going to produce the new product – and the question wants to know how much profit the new product will end up making and therefore we are only interest in the costs specifically relating to the new product.(If the decision was yet to be made, then we could compare the profit from the new product with the lost contribution. But that is not the case here.)
Sir, thank you very much. I have understood when/when not to include Opportunity costs(OC) in Lifecycle costing i.e, when a decision has already been made to make a new product, we don’t include the OC; but when deciding whether or not to make a new product we include the OC.
Sir, regarding the same question, there is a Patent application cost of $500000 which includes $20000 of lawyer fees, who is a permanent employee of the Company. The answer provided includes the whole amount ($500000).
I don’t understand why the answer doesn’t deduct the lawyer fees of $20000 , because he/she is a permanent employee and would be paid regardless of any type of work he does for the Company. (Is it because the Company has to recover salary costs? If so, does it mean that any other project the Lawyer works on wont include the Lawyer fees OR the salary costs would be apportioned to all the project he works on?)
Thanks
Again if it was a relevant costing question, and we were having to make a decision then we would not include it.
However the object here is to ensure that the product makes an overall profit after taking all associated costs into account.
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