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Hello Sir, i hope you are doing well. My Question Relates to Robber Company (June 2012 Attempt).
1) Sir for Note no. 4 which deals with Machine Cost and Examinar has commented that.
“In the suggested solution, the $4k and $6k machine costs are treated as specific fixed costs and are therefore included in the relevant cost of manufacturing in-house, together with the depreciation.
However, it is acceptable to assume these costs to be general fixed costs and therefore exclude them for their manufacture cost together with the depreciation”.Sir while solving the question i actually excluded the fixed cost of $4k and $6k thinking that, although these are cost related to specific machines that will be used for Keypads and Display screen however it has no where mentioned that these cost will cease to exist in case we outsource the work or it will occur only in case production will be carried out (Therefore it is a general fixed cost). Is my argument valid as to why it’s general.
2) Sir for Note 5, which deals with Depreciation and Insurance Cost. Why have be taken 40% cost as Relevant.
Isn’t depreciation a Notional Cost (non cash cost) and therefore never relevant for decision making.Can you please help me out sir.
In answer to your questions
Note 5
The question asks you whether you should continue or outsource – so you are looking at the incremental cost of making them in house.
It states that 40% is specific to the manufacture of keypads and screens. So, to work out the cost of making them inhouse this is a cost you incur – therefore it is relevant to the overall cost.Note 4
It has been assumed that the fixed set-up costs arise if production takes place. So the $4k and $6k machine costs are included in the relevant cost of manufacturing in-house.
It is acceptable to assume these costs to be general fixed costs and therefore exclude them for their manufacture cost as long as you stated why in your answer.I understand it’s a specific cost, but isn’t depreciation a Notional and Non-cash cost in nature.
So if we include it aren’t be violating the principle of Relevant Costing
Depreciation by definition is a non-cash flow, dependent on past purchases and somewhat arbitrary depreciation rates, and is not always relevant BUT if it states “specific” then it is relevant to the decision being made.
Or Tutor could it be because of the specific Insurance Cost, as an insurance cost is cash in nature and the 40% would arise only in case production/manufacturing of Keypads and screen
As stated before:
60% of the depreciation & insurance relates to general factory depreciation and insurance so it is not relevant but the $4k and $6k machine costs which is the 40% is “specific” to the manufacture of keypads and display screens as I have already explained so this is part of the incremental costs of making them.
As I explained above:
It has been assumed that the fixed set-up costs arise if production takes place.
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