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Relevant Costing

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Relevant Costing

  • This topic has 2 replies, 2 voices, and was last updated 10 months ago by LMR1006.
Viewing 3 posts - 1 through 3 (of 3 total)
  • Author
    Posts
  • September 4, 2024 at 8:29 am #710749
    aamna808
    Participant
    • Topics: 24
    • Replies: 9
    • ☆

    A company needs 400kg of material Z to fulfil a customer order in one month’s time.

    It currently has no material Z in inventory. The current purchase price of material Z is $20 per kg and this is expected to rise to $24 per kg in one month’s time. Material Z is perishable and normally 20% of stored material is lost per month.

    Material Y is able to be converted to material Z at a cost of $4 per kg. The company expects to have 200kg of material Y in inventory in one month’s time. Material Y could be sold as is for $18 per kg or could be converted into 200kg of material Z. Material Y is not perishable.

    What is the total relevant cost of material Z to fulfil the customer order?

    Solution:
    Tutorial note: The total relevant cost is the lowest cost of the three options: (1) buy now and store for a month, (2) buy in one month’s time or (3) convert material Y.

    WORKING

    Cost per kg:

    1) Buy Z now and store, allowing for loss ($20/(1 – 20%)) $25
    2) Buy Z in one month’s time $24
    3) Convert material Y
    ($18 proceeds foregone + $4 conversion cost) $22

    Therefore, convert 200kg material Y and buy 200kg Z in one month’s time. The relevant cost is (200kg × $22) + (200kg × $24) = $9200

    I do not understand as to why we divide $20 by 0.8?? Should we not multiply 0.8 kgs with $20 to calculate the cost of amount that is not lost?
    For the third option, do we not choose the higher of alternate use and loss of scrap value? I.e $18?

    Kindly let me know as I think I’m mixing different concepts together? Thanks in advance!

    September 4, 2024 at 10:28 am #710753
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1513
    • ☆☆☆☆☆

    It currently has no material Z in inventory so we have to buy in or make Y into Z.

    The current purchase price of material Z is $20 per kg so it is perishable so can’t be bought in advance and normally 20% of stored material is lost per month.
    So the price will be $25 with a 20% loss – you have to buy more because some of it is thrown away.

    Or we can convert Y into Z
    There is 200kg in stock which could be sold for $18 or used and converted at at a cost of $4 so that makes $22
    The other 200kg will have to be bought in as Z at $24 already ready to go……

    September 4, 2024 at 11:16 am #710756
    LMR1006
    Keymaster
    • Topics: 4
    • Replies: 1513
    • ☆☆☆☆☆

    Don’t worry
    You are having last minute doubts
    You can do this!

    :0-)

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