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August 15, 2018 at 4:30 am
Great lecture, well explained. Thank you!
John Moffat says
August 15, 2018 at 8:00 am
Thank you for your comment 🙂
August 10, 2018 at 3:51 pm
Dear sir, if the replacement value of the inventories was lower than the scrap value ($4.2 x 7500 kgs) $31500 then what would be the relevant cost be? Will it still be the $31500 or its replacement value say, $30200??
August 10, 2018 at 4:36 pm
It would be whatever was the lower, so in that case 30,200.
August 10, 2018 at 11:17 pm
August 11, 2018 at 8:44 am
Yo are welcome 🙂
August 5, 2018 at 10:37 am
Sir why you calculated the overdraft for 3 month i.e 20000*18/100*3/12 = $900, instead of 20000*18/100 = $3600 as interest on overdraft is not given as 18% per annum.
August 5, 2018 at 10:51 am
Interest rates are always quoted as annual rates, unless told differently (both in exams and in ‘real life’).
August 4, 2018 at 4:20 pm
at 12:03 you worked out that supervisors will only be paid the bonus . If because of the supervisors leaving, production would stop at their current position, would the cost of their normal labour pay be included, even though they are not replaced?
August 5, 2018 at 10:08 am
We would bring in all the current earnings less all costs saved (which would not include their pay) as an opportunity cost.
August 5, 2018 at 9:21 pm
thank you very much sir , i think i’m starting to get it, I cant believe i get so stuck on this detail compared to all the other learning prerequisites
August 6, 2018 at 6:55 am
You are welcome 🙂
July 2, 2018 at 6:10 pm
Sir, could you please help me understand question 40, Stay Clean part 4.
Also, I tried posting it in the ask the tutor forum but the page was inaccessible. Please do help because I simply cannot understand it from the text book.
July 3, 2018 at 7:47 am
The Ask the Tutor forum is working fine, and you must ask this sort of question there and not as a comment on a lecture. (Also, please do not just say “question 40” because I have no idea which book you are referring to – instead give the date of the exam it was in.)
You have not said which part of the answer you had problems with, but you might find an answer to your problem on this page: https://opentuition.com/topic/december-2009-q5-stay-clean/
July 3, 2018 at 2:53 pm
Like I said sir, every time I click on the ask the tutor forum I get a message saying “the page you are trying to search does not exist”
And it was Q40 of the practice text book dated September 2015 – August 2016, question heading “Stay Clean”
July 3, 2018 at 3:47 pm
update your bookmarks. ACCA exams names have changed..
July 6, 2018 at 11:56 am
Thank you sir
July 6, 2018 at 7:13 pm
February 3, 2018 at 12:16 pm
Thank you for this great lecture
November 9, 2017 at 10:36 am
Sir, I still don’t understand why we don’t take into account the overdraft. Is it because it is a committed cost?
November 10, 2017 at 7:51 am
The only cost of having an overdraft is the interest. There is nothing in the question to suggest other than that the overdraft will be repaid later – the money is not being invested int he contract.
April 24, 2018 at 11:10 am
sir i do not understand your answer….
April 24, 2018 at 3:08 pm
Borrowing money and then repaying it isn’t costing anything except for the interest they charge.
August 11, 2017 at 5:35 pm
Very intersting lecture.Thank you sir!!!!!!!
July 13, 2017 at 2:03 am
Example 2, note 3. Let’s assume that there is no incremental fixed overhead of $1,000 in this example. If the deal to produce the special order actually goes through then, won’t it be strange to create a cost card for a product with no fixed cost attached to it…
July 13, 2017 at 6:47 am
We don’t create standard costs cards for ‘one-off’ projects (which is what relevant costing is concerned with).
Even if we were creating a standard cost card for ‘normal’ products, then it if it is absorption costing we do include absorbed fixed overheads, but if it is marginal costing then we do not include fixed overheads. However this is examined at Paper F2 and is less likely to be relevant for F5.
July 15, 2017 at 12:17 am
July 15, 2017 at 11:01 am
July 11, 2017 at 3:31 pm
For Example: ABC Ltd is a plastic manufacturer who produce plastic cups and plastic jugs, since the market price of a row material (called resin) was lower therefore the finance director decided to buy resin in large volume (3 months material stock) in cash.
ABC Ltd just suddenly receive a new special order for Plastic Glass.
1) My question here is, does the cost of resin is relevant ? 2) will we really just ignore the material cost, just because it is already being paid ?
July 12, 2017 at 7:10 am
I can’t answer you without seeing the whole question. But please ask this sort of question in the Ask the `Tutor Forum, and not as a comment on a lecture.
July 12, 2017 at 2:33 pm
Noted Sir, I will raise question in forum.
July 9, 2017 at 4:33 pm
I have a reservation with note 5.
Since the special order requires 6,000hrs, and our machine currently has 4,000hrs available capacity, shouldn’t then the relevant costs be the extra 2,000hrs x $3 = $6,000?
And of course the lost contribution of $4,000 as well.
July 10, 2017 at 7:20 am
Yes, but in addition the 4,000 hours available capacity still need paying for at $3 per hour. At the moment the machine is not running for those 4,000 hours. If it does run then it will cost $3 per hour.
July 10, 2017 at 7:03 pm
June 14, 2017 at 11:46 am
Since we are doing the contract the forgone alternative which the income we are going to earn when we sell the material is the opportunity cost for doing the contract. If we are not doing the contract the imcone we earn when sell the material is the 7500kg * $4.2 = 31500.
July 10, 2017 at 7:21 am
Which is what I do in the lecture!
May 30, 2017 at 1:44 pm
Regarding the Bank OD, yes it is not incurred upfront (no outflow of cash) as you explained in this lecture. But, it is still however repaid at the end of the project duration of 3 months. So, why is this not an extra cost apart from the OD interest. Wouldn’t the company not opt for the OD of 20,000 if not for this project. So no 20,000 is borrowed and repaid.
However, whether the project is taken up or not, as the money is borrowed and repaid, it would cancel out to zero and it’s only the OD interest that is extra cost incurred which is considered in the revised cost schedule.
Please confirm if my understanding is correct.
May 30, 2017 at 4:22 pm
Your understanding is correct 🙂
May 30, 2017 at 7:48 pm
Thank you for confirming 🙂
May 31, 2017 at 8:49 am
May 26, 2017 at 4:49 pm
Thank you sir for the lecture.
I have two things I’m not clear of.
1) in note 6 about the materials, if the material replacement cost was lower than what the company could have earned by selling them, what would be the relevant cost here?
2) at the end of the lecture you have mentioned committed cost. Can the bank overdraft be considered as one of them? If not, could you please give me another example of such a cost.
May 27, 2017 at 8:08 am
1. If the replacement cost were lower, then this would be the relevant cost. (The existing inventory would not be used, but would be sold).
2. A committed cost it one that you are going to have to pay whether or not you do the new project. For example, you might have had market research done but have not yet paid the bill. You are going to have to pay the bill whether you go ahead or not and it is therefore irrelevant for the decision (like a sunk cost).
May 27, 2017 at 2:37 pm
Very well understood. Thank you so much sir, for all these lectures and clearing doubts, but also for being the founder of opentuition.com.
May 27, 2017 at 4:13 pm
You are very welcome 🙂
February 19, 2017 at 12:21 pm
Can I ask with regards to example 2, point 6. When I looked at the question initially my approach would have been to sell all 10,000KG of material (held in stock) for £42,000. Then brought replacement material for £33,375, resulting in no cost but a reduction of overall cost.
I fully understand where your figures have come from, I’m just curious to know had I taken my approach would it have been completely wrong? Or would it have been considered an acceptable answer?
Thank you in advance, and thank you for these lectures. I am finding them a massive help in understanding how to approach the questions.
March 3, 2017 at 5:38 am
I had the same issue. But I think there is no need to repurchase those 10 000 KG since its clearly stated that this 10 000 Kg would not be used in the future. Therefor I think we should only consider the revenue lost (opportunity cost) due to using 7500 Kg, which amounts to $31 500. Hope this helped.
November 8, 2017 at 9:05 am
Same thought as Gemma. If we sold all inventory (10,000 kg) at $4.2 and repurchase 7,500 kg for the contract at $3.3375, we have saved of $16,969. Therefore, we only need an overdraft of $3,031 instead of $20,000 and relevant cost is $25,031 (7,500kg * $3,3375/kg) without losing income from selling inventory.
Summary, relevant cost is $25,031. That’s it.
November 8, 2017 at 9:44 am
But selling all the inventory has nothing to do with it.
Whether or not they do the contract, the extra 2,500 kg can still be sold – so that is irrelevant to the decision. All the is relevant is the opportunity cost of the 7,500 needed for the contract.
The solution in the lecture is completely correct (and is the same as the original examiners solution – this was an actual exam question!).
February 9, 2017 at 10:21 am
Thanks for your lecture. As I know that financial cost such as interest and dividend is irrelevant cost, but in this lecture you consider the interest to be relevant cost. Please but could you explain it?
February 9, 2017 at 3:23 pm
I do not know why you say that interest is an irrelevant cost!!
We are wanting all extra costs of doing the work, and if they have to borrow money to do the work and therefore pay interest, then the interest is an extra cost.
(I think you may be confusing this with investment appraisal, which is something completely different and is not examinable in Paper F5.)
January 9, 2017 at 4:00 pm
Hello Sir, I’m revisiting this chapter one more time as I’m really struggling with relevant costing.
In Note 5, 2,000 hours of 6,000 hours has to be taken off the machine. Does it not make it committed cost; already committed to another job? If so, the relevant costs will be:
– variable cost: 4,000 hours x $3 = $12,000 (instead of $18,000) – opp. cost: 2,000 hours x $2 = $ 4,000 – Total: $16,000 (instead of $22,000)
Would you please kindly explain why this is not committed cost?
January 9, 2017 at 4:52 pm
Have you watched the lecture (because I do explain in the lecture, and there is obviously no point at all in using the lecture notes if you are not watching the lectures 🙂 )
The lost contribution of $2 per hour is after charging all variable costs including the machine overheads of $3 per hour.
Since the $2 per hour will be payable anyway, the lost amount is $5 per hour. So for the extra 2,000 hours needed the opportunity cost is 2 x $5 = $10,000. (The other 4,000 hours available capacity will cost $3 per hour, so a total of $12,000)/
Do the overall total is 10,000 + 12,000 = $22,000
(This was in fact an old exam question 🙂 )
January 9, 2017 at 5:56 pm
Thank you so much for your quick response. I’ve watched the lecture twice and was watching it again when you replied. It will be unwise not to watch your wonderful lectures.
However, I had to chew on your reply quite a few times but I finally got it. Eureka! So, my calculation, in effect, would have deducted the $3 variable cost twice resulting in not charging the electricity cost at all. Therefore, you have to calculate it in the way described either in the lecture or alternatively in your reply above. With hindsight it’s always very obvious. 🙂 Makes you wonder why I didn’t get it in the first place.
Thank you again for your help Sir. You are a star!
December 6, 2016 at 2:41 pm
Hi Sir, Thank you for the lecture. Regarding Depreciation since it is not cash-flow should be irrelevant? relevant costs should be cash-flow, future, incremental?
December 6, 2016 at 3:17 pm
Correct, and in my revised schedule I did not include depreciation! (The original schedule had included it, but that was prepared wrongly).
December 6, 2016 at 7:49 pm
Thank you Sir 🙂
December 7, 2016 at 6:26 am
December 1, 2016 at 9:15 am
For Note 6, where it says we can sell either the complete inventory of 10,000 kg OR part thereof, why have we decided to include ONLY the 7500kg X $4.20 worth of opportunity cost instead of 10,000kg X $4.20? (Considering there’s no mention in the question that the new contract only requires 7500kg and therefore the remaining 2500kg can/will be sold anyway?)
December 1, 2016 at 12:00 pm
That is not the opportunity cost Since the statement only tells us that the inventory held “in stock” i.e. 10,000 kg has a scrap value (aka. NRV) of $4.20/ kg. (Whenever we use the items that are available in stock we take the Higher of the alternative use and the NRV. Here the statement tells us there is no alternative use). Thus the relevant cost for Parser ltd would be ($4.20 x 7500 Kg= $31,500/-) as the number of kg’s required is only 7500 kg and not more. The Opportunity Cost principle does not apply here.
June 14, 2017 at 11:33 am
Opportunity cost is that cost we choose to incurred as part of the relevant costs when undertaking a new project as far as that costs will be covered and still yield profit. Simply put, opportunity cost is the forgone alternative cost.I hope this help. John is indeed, a perfect tuitor for us all here.
June 14, 2017 at 3:27 pm
Thank you for the comment 🙂
December 1, 2016 at 3:10 pm
The question does say that the contract requires 2,500 kg, because that was what was on the original schedule (even though the inexperienced accountant had costed it incorrectly).
The opportunity cost principle certainly does apply!!!!! The lost scrap value of the 7,500 kg is a perfect example of an opportunity cost. The definition of an opportunity cost is that it is lost income!!!
November 8, 2017 at 9:11 am
Hi sir, If we sold all inventory (10,000 kg) at $4.2 and repurchase 7,500 kg for the contract at $3.3375, we have saved of $16,969. Therefore, we only need an overdraft of $3,031 instead of $20,000 and relevant cost is $25,031 (7,500kg * $3,3375/kg) without losing income from selling inventory (we still earns profit hence it’s not opportunity cost).
Finally, relevant cost would be $25,031. That’s it.
November 8, 2017 at 9:46 am
Your understanding is wrong. See my answer to your other post.
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