- This topic has 1 reply, 2 voices, and was last updated 7 years ago by
.
- Posts
Hi
I have a question with regard to relevant costing and it reads as follows
“A company is calculating the relevant cost of a material to be used on a particular contract.
The contract requires 4200kg’s of material H and this can be bought for $6.30 per kg.
The company bought 10000kg’s of material H some time ago for $4.50 per kg. Currently 3700kg’s remain in stock. The stock of material H could be sold for $3.20 per kg
The company has no other use for material H other than this contract, but it could modify it at a cost of $3.70 per kg and use it as a substitute for material J. Material J is regularly used by the company and can be bought by the company for $7.50 per kg.
The relevant cost of material is?”
Now my answer is $28360 and I’ll explain how i get to that. The company requires 4200kg’s of H, but has 3700kg’s in stock. However if the company bought the full 4200kg’s then the remaining 500 could be used for material J which in essence will cost $3.80. Therefore (4200x$6.30)+($3.8×500)=$28360
Ok so we agree that in order to obtain 4200kg of material H we need to use:
500 kg bought in at current market price of $6.30
AND
3700kg which we already have in stock.
Its the relevant cost of the 3700kg which needs consideration.
With that 3700kg the company has the ‘opportunity’ of selling it for 3.20 per kg OR they have the opportunity to save themselves money by converting it and so reducing cost of material J i.e. $7.50 -3.70 =3.80 would be saved per kg if converted to material J (instead of using it for this contract).
They will choose the highest opportunity cost here so the 3700 kg will be valued at the opportunity to make savings of $3.80 per kg.
Total relevant cost is
(500 x $6.30 )+ (3700 x 3.80) = $17,210Hope that explains ok.
- You must be logged in to reply to this topic.