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It is company’s policy to charge all contracts with notional interest at 8% on estimated working capital involved in contracts. (interest charge for contract A is 5120 and contract B is 6400).
headquaters costs alllocated at rate of 5% on total contract costs on contract A is 12,676 and on contract B is 3240.
both these costs are not taken as relevant costs.
reason they gave is
it is assumed that the notional interest has no cash flow implications.it is assumed that the HQ costs are not specific to particular contracts.
why it is assumed to be have no cash flow implications and HQ costs not relevant costs?
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