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Sir I am getting veryyy confused in relevant costing
In one question that I saw in sep2019 examiner report in this question when material Y present in inventory was converted into Z and use that as a material the relevant cost was scrap value which was opportunity cost 18 + converting into material. Z cost 2 /kg total cost was 22Now I came accros this question
H has in inventory 15,000 kg of M, a raw material which it bought for $3/kg five years ago,
for a product line which was discontinued four years ago. M has no use in its existing state
but could be sold as scrap for $1.00 per kg. One of the company’s current products (HN)
requires 4 kg of a raw material, available for $5.00 per kg. M can be modified at a cost of
$0.75 per kg so that it may be used as a substitute for this material. However, after
modification, 5 kg of M is required for every unit of HN to be produced.
H has now received an invitation to tender for a product which could use M in its present
state.
What is the relevant cost per kg of M to be included in the cost estimate for the tender?
A $0.75
B $1.00
C $3.00
D $3.25Here why they didn’t consider like either selling it it will make them earn 1 per kg or if they use it for other material then the cost will be opportunity cost of 1 and converting into the material cost 0.75 total relevant should be 1.75 . That is not even in the option
These two question just made my mind soo messed up
Please sir can you please clear this confusionAnd also in question we consider the material cost which is low and in on we select the one which is of high value?
In the first question, if the material is not converted and used then it would be sold as scrap for $18.
Therefore it they do use it in place of Z then they lose the $18 they would otherwise have received and have to also pay the cost of converting it.
In the second question, if they do not use the use M in the tender then they would have the choice of either scrapping and receiving $1 or could instead use it on their current products instead of HN. Using it on their current products would mean that for every 5 kg they used they would save having to buy 4kg x $5 = $20 but would have to pay 5kg x $0.75 = $3.75 to convert.
So a saving of 20 – 3.75 = $16.25 for every 5kg used, or 16.25/5 = $3.25 per kg.That is the choice if they do not use M for the new tender – sell for $1 or convert and save $3.25.
They would obviously choose to convert and use it in one of their current products because the saving is greater than scrapping.So if they do instead use M in the new tender they will not be converting and using it in their existing product and so they would not make the saving of $3.25 which is therefore the relevant cost,
Sir for second question you said they are making saving of 20 by converting M
Why no then in above question we can also say that they are making saving of 24/kg of 200kg in inventory but to make that saving they have to spend 4 /kg
I don’t think there is much difference in both the question but they way solving it is different
In above you added the cost in opportunity cost
In second you said they are making saving
Then why not solve 1st question with same method ?In the first question we are finding the relevant cost of using the material to convert into material Z. If they do not convert it then the only thing they could do with the material would be to scrap it.
In the second question, we are wanting the relevant cost of using material M in the new tender.
If we do not use it in the new tender then there are two things that could be done with the material. One would be to scrap it and the other would be to use it instead of HN on one of their existing products. If we did not do the tender we would choose the best of the two things which would be to use it instead of HN. We would not want to scrap it.
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