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  1. Sir i have a big doubt.In the entire question we are assuming that the project will carry on for 1 year. What if we assume that we are stopping the project now, then firstly we will not be incurring the research staff wages cost of 60,000 and severance pay will be nil.
    Secondly if we stop the project now then there will be a saving of 7000 for rent which will be deducted from the cost. So the entire scenario changes if we assume that the project does not carry on for a year and stops immediately. Could you clarify if I’m right or wrong. A bit confused with this.

    • We are considering whether or not continuing the project is worthwhile. Therefore we bring in all the direct costs that would be incurred by the company if we continue. We also bring in the opportunity costs and savings to the company that will occur by continuing with the project. If we continue we pay rent. If we continue we do not have to dispose of the materials and so continuing will mean saving the disposal costs.

      It is all the same logic as relevant costing in the previous PM (old Paper F5) exam.

  2. Sir i have a doubt. The materials are toxic and so if they are not used in the contract then disposal cost of 5000 will be incurred. So assuming that they are not being used in this project, then the savings of (5000) will become a cost right? That is 5000 disposal cost.

  4. Hi John ,

    In relation to the prime cost. The Labour is a cost that will be spent regardless, but are the 60,000 materials not the 60,000 mentioned in the materials section that have already been bought and therefore a Sunk cost?

    Thanks,
    William

    • No, it is a coincidence that they are both $60,000.
      There is no reason at all why the materials needed for the new project should be the same as the materials that would be used to make whatever would be made if the labour was returned to production.

  6. Sir, I got doubts in 3 keen areas.
    1.) In labour why did we ignored the cost of overhead absorbed $20000?
    2.) In general building, why we ignored $35000?
    And finally when you were finding the total cost, it’s been $174000
    Should’nt we add 150000 along with the total cost to see that if we carry on the project it will be profitable or not?

    Thankyou.

    • But I do explain the treatment of each of these in the lecture!

      1. Absorbing overheads is simply charging part of the overheads to the project for profit purposes. It does not mean that total overheads have changed, and unless the total has changed it is not relevant.

      2. The same reason as (1). There is no mention of there being any extra cash flows, and it is only additional cash flows that we are concerned with.

      3. This is a sunk cost. The money has been spend whether or not we do the project and it is therefore not relevant.

      I do suggest that you watch the lecture again and read carefully section 2 of the chapter in the lecture notes (and if needed, then also the lecture on relevant costing in Paper F5).

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