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February 26, 2021 at 9:16 pm
Could you please explain me materials (note 6) the wording of amounting to 10,000 that is given in the bracket. What does that mean?
Also when I checked to the answers at the end of notes it is given historic cost of 34000 (for note 6) what is this amount referred to?
John Moffat says
February 27, 2021 at 8:15 am
The question says that there are 10,000kg in inventory. The special order needs 7,500 kg of materials and so these will come from the inventory (since they are not wanted for anything else). The question also says that the $34,000 appearing in the original schedule was the cost when the kgs were first purchased.
Have you watched the lecture working through this example?
February 27, 2021 at 3:48 pm
Thank you Sir for the reply.
Yes sir, I watch lectures. And also do the mcq questions at the end.
February 11, 2021 at 11:29 pm
I am not very clear on committed cost and why do we not include it in relevant costing. Can you please give me an example of committed cost?
For example, is a solicitor’s cost committed cost? It is usually paid wether or not the deal goes through. As it is relevant to the project itself, I would think of it as a relevant cost.
February 12, 2021 at 6:46 am
A committed cost is a cost that will have to paid whether or not the new contract is accepted. We are not doing financial accounts, to make the decision we simply need to know whether or not accepting a new contract means paying extra costs or not. In your example of a solicitor, you would only pay the costs if you decided to go ahead with using a solicitor (whether or not the deal goes through is irrelevant, so it is not a committed cost).
February 13, 2021 at 10:30 am
November 2, 2020 at 9:22 pm
In the bank overdraft of $20 000, you had a reply wherein you said that it would be paid back in the future. Therefore, is it safe to say that it is a committed cost since we will pay it back whether or not we take the special order?
November 3, 2020 at 9:48 am
Effectively yes (although what we call it doesn’t actually matter) 🙂
August 14, 2020 at 1:32 pm
You are a an amazing teacher.Bless you Sir!
August 14, 2020 at 3:15 pm
Thank you for your comment 🙂
June 28, 2020 at 5:17 pm
Dear John, thank you so much for your appreciated time.
March 31, 2020 at 11:19 pm
April 1, 2020 at 8:54 am
You are welcome 🙂
February 5, 2020 at 9:36 pm
i saw someone asked this already, but still not sure why you calculate it that way then. So if I use machine 4000hrs extra and add lost contribution, I calculate it as 4000×3 + 2000×2 = 16000 or 6000×3 + 2000*(2-3), where 2-3 represents lost contr. minus saved machine OH, in both cases you get 16k relevant costs. What am I forgetting here so I would get to 22k like you did?
Thanks for assistance in advance, much appreciated.
February 6, 2020 at 7:52 am
For the 2,000 hours being used on an existing job, the $2 contribution is after charging variable costs and so is after charging the running costs of $3. They will still be paying the running costs for those 2,000 hours, so what they will actually be losing is $5 per hour (the revenue less other variable costs).
So in total they are losing 2,000 x $5 = $10,000. In addition they are paying for another 4,000 hours at $3 per hour, which is $12,000. So a total of $22,000 🙂
February 6, 2020 at 5:18 pm
Perfect, thanks a lot for clarifying this issue.
February 7, 2020 at 7:45 am
December 6, 2019 at 1:41 pm
Hi sir, I’d like to clarify:
“Because the business does not have adequate funds to finance the special order, a bank overdraft amounting to $20,000 would be required for the project duration of three months.” Does this not mean that they spent specifically 20,000 more to finance the special order, therefore, is considered an opportunity cost?
December 6, 2019 at 1:56 pm
No. There is no mention of them having to spend the $20,000 on anything specific. So presumably they will pay back the $20,000 later and the only relevant cost is the interest.
(This is in fact a very old exam question)
August 17, 2019 at 7:05 pm
Thank you very much John. I am so sorry but I did not understand in the example 2, in the note 3, why do we ignore general overheads of $3,000. Could you please explain one more time here.
Many thanks in advance
December 4, 2019 at 1:00 am
As explained, the overhead apportionment of $3000 would be incurred whether or not the special order is made. However, the incremental cost of $1000 is an extra cost resulting directly as a result of the engagement of the new special order which is a relevant cost. I hope this helps
July 31, 2019 at 10:47 pm
Good day sir,
I think, I misunderstood #2 of example 2: In the notes it says “In addition, the supervisor would lose incentive payments in his normal work amounting to $2,500.” From that sentence, doesn’t it mean that the supervisor would lose incentive during normal work and that is why in the special order work he/she is gets the incentive?
Thank you in advance for your clarification!
August 1, 2019 at 7:47 am
The company will not pay him the normal bonus (of $2,500) and so the company will save $2,500), but instead they will pay him $3,500 and so the net cost to the company will be an extra $1,000.
April 18, 2019 at 3:08 am
#5 of example 2. If you have available capacity of 4000 hrs and the special order needs 6000 hr. shouldn’t the cost be 2000hr @$3 per hr (needed to make up that 6000 hr) plus the opportunity cost of taking that 2000hr off their normal job? Because there is no extra cost involved for that 4000 hrs if the machine has the capacity.
April 18, 2019 at 6:02 am
Although the machine is capable of running for an extra 4,000 hours, it is not currently doing so (which is why there is available capacity). If it does run for the extra 4,000 hours then there will be extra running costs (such as more electricity used).
September 29, 2019 at 8:01 pm
Thanks for the lecture again.
Relating this question, if it wasn’t the machine and it was labour that has spare capacity, do we still pay extra? We already pay them anyways yes?
September 30, 2019 at 7:55 am
It depends on the wording. If labour is paid a fixed salary then there is no extra cost. If labour is paid by the hour then there will be extra cost.
August 9, 2020 at 5:06 pm
Hello Mr John,
I have question for point 5
4000hrs is available capacity which means machine is anyways idle for 4000hrs and hence idle capacity hours relevant cost is 0.
For 2000 hrs *5 = 10000 shall be relevant cost??
October 31, 2018 at 8:44 am
Thanks John. Excellent presentation. Only future incremental cash flows should be considered as relevant in undertaking the special order. It is economical to hire cheaper subcontractors for the special order than higher cost might suggest. Fixed cost is not relevant unless there is an incremental fixed cost or a directly attributable fixed cost (product specific fixed cost). Apportioned costs are not relevant. Opportunity cost is always relevant (value of the best alternative foregone for the special order).
Depreciation is not a cash flow so not relevant. Sunk (dead) cost in respect of materials is never relevant (we can’t change the past).
October 28, 2018 at 2:12 pm
could you please explain why we are not using the replacement cost instead of the disposal cost of ($4.20)?
Because material is no longer used, but it is used for the special contract.
So i thought that we would use the materials at cost $33.375 and the remaining materials will be sold off.
Im just confused and can’t understand unless this isnt cleared, please.
October 28, 2018 at 2:54 pm
They could do what you suggest, but they would then be paying out 33,375 to buy new materials and would only be receiving 31,500 by selling the existing materials.
It would therefore be cheaper to not buy new materials and simply use the existing materials.
October 28, 2018 at 2:04 pm
Hi John ,
In the bank overdraft part of the question , I have considered a different scenario where the company has adequate funds yet decides to take a loan amounting to $20,000 specifically dedicated for the one-off job and would be repaid after the same 3 month duration and for example this was done to allocate the existing companies funds to expenses without going negative in the bank balance. Will the $20,000 loan for the specific job be considered as extra costs relevant to the one-off job in this scenario ?
Thank you very much for the lectures Sir.
October 28, 2018 at 2:51 pm
No – the situation would be exactly the same. Just as with the overdraft, the money is repaid (and so not actually spend on the project) and therefore the only cost is the interest.
August 14, 2019 at 3:47 pm
Sir I am still very confused.
20,000 is more like a replacement cost, because your going to have to take the bank overdraft because youve used up 20,000 from the amount set aside for the normal course of actions.
August 15, 2019 at 7:12 am
The question lists where money is spent and presumably that is the reason they went overdrawn, but there is no mention of specifically spending thee 20,000 on anything. If you borrow 20,000 from me, you will have to repay me and the cost involved of borrowing is just the interest you would have to pay me.
September 24, 2018 at 11:24 am
Sir, regarding the final point on the overdraft issue, isn’t the bank overdrafting $20,000 because of the special project? Does it not mean that if the special project wasn’t accepted then an overdraft of $20,000 wouldn’t occur? So, Shouldn’t we add $20,000 in addition to the interest payments?
I’m hoping you can clarify
Thank you so much
September 24, 2018 at 4:02 pm
It is true that the overdraft would not occur (and therefore they would not be paying interest).
However it does not say that they spent the 20,000. It simply means that their balance balance goes negative for three months (and then presumably it stops being negative at the end of three months).
September 24, 2018 at 6:26 pm
thank you sir
September 25, 2018 at 6:02 am
September 23, 2018 at 5:11 pm
why we do not charge the whole 18% interest but only for 3 month , as understood the the OD is taken because of this special order so the whole interest should relevant not only 3 month duration of the job. please clarify my doubt
September 24, 2018 at 7:40 am
Interest is always given as a yearly rate (unless told differently). Therefore the interest has only been calculated for 3 months.
September 4, 2018 at 5:13 am
Can you explain for the materials part as I don’t really quite understand. I will appreciate your help.
September 1, 2018 at 4:23 pm
When you account for machine overheads, why you multiply $3 electricity for 6000 hours, when there are 4000 hours available capacity? If you take 2000 hours of capacity from another process, so you will not spend extra electricity for it.
September 2, 2018 at 10:11 am
Correct – we will be paying the electricity anyway. However we will be losing the revenue from the other job and saving all the other variable costs (except for electricity).
The net loss (revenue less other variable costs) is always the same as the contribution plus the electricity.
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