[mahfuz]

Method 2:-
You can also treat the saving of relevant cost $8 and saving of fixed cost $3 as a relevant cost of making. Because if you make the product you will not be able to save this cost using the facilities in another product. Thus increase in relevant cost of making.

Relevant cost of Making –Per unit

---

Total
Direct Material

---

$2

---

(5000 X 2

---

$10000
Direct labour

---

$12

---

(5000 X 12)

---

$60000
Variable overhead

---

$5

---

(5000 X 5)

---

$25000
Saving in relevant cost

---

$8

---

$40000-($40000/500=$8)
Saving in Fixed cost

---

$3

---

(5000 X 3)

---

$15000
_______________________________________________________________
Relevant cost of making –$30

---

$150000………..(i)
_______________________________________________________________
Relevent cost of buying—$27

---

(27 X 50000)

---

$135000…..(ii)
_______________________________________________________________
Saving by buying

---

$3

---

$15000…..(i less ii)
===============================================================

*** In method 2, question stated that the fixed factory overhead is $7. But fixed cost is not a relevant cost unless it’s directly attributable to the product. If you look at the beginning of the question, it has been told that if the company buy the product company will be able to eliminate $3 of fixed factory overhead. This is the indicator of the fixed cost which is directly attributable the product. Thus $3 of this $7 is relevant other ($7 less $3) =$4 is not relevant.

[mahfuz]

Answer:-
The make or buy decision will be taken based on the lower of

Relevant cost of making the product
Or
Relevant cost of buying the product

Let’s calculate the relevant cost of making and buying the product

Method 1:

---

Per unit

---

Total
Relevant cost of buying

---

$27

---

(27 X 5000)

---

$135000
Saving in relevant cost

---

($8)

---

($ 40000) ($40000/500=$8)
Saving in Fixed cost

---

($3)

---

(5000 X 3)

---

($ 15000)
______________________________________________________________
Relevant cost of Buying

---

$16

---

$ 80000……………(i)
______________________________________________________________

Relevant cost of Making
Direct Material

---

$ 2

---

(5000 X 2)

---

$10000
Direct labour

---

$12

---

(5000 X 12)

---

$60000
Variable overhead

---

$ 5

---

(5000 X 5)

---

$25000
_______________________________________________________________
Relevant cost of making

---

$19

---

$95000……………(ii)
_______________________________________________________________
So saving on buying

---

$3

---

$ 15000 ….….(ii less i)
===============================================================

***You can treat the saving of relevant cost (40000/5000=8) and saving on attributable fixed cost $3 as a reduction on your buying cost. Because if you buy the product you will be able to save this cost thus you will be able recover some portion of buying cost by saving some relevant cost.

[mahfuz]

hi there
i have one for sale………….if u still need it u can contact with me.

thanks

[mahfuz]

thank you sids

[mahfuz]

Hi sunny20

Sid is absolutely correct.
let me explain the basic principle to determine weather a cost is relevant or irrelevant.

***1) Avoidable/Relevant:- The cost which is directly related to the decision. if you take the decision cost will be incurred, if you don’t take the decision you wont be incurred the cost.

***2) Cash flow:- To recognise the relevant cost it should have to be cash flow, any cost which wont make cash flow are not relevant e.g Depreciation.

you question meet this all criteria……..
now your question is the amount. how much you should recognise as a relevant cost………???

it’s the minimum (amount) of cost you have pay for anything if you take the decision.
like in your example
If you hire the machine for 3 months you cost will be 75 X 3 = 225

but in your question there is a condition that you have to pay a minimum charge of 300. this means it doesn’t mater how many weeks you use the machine even if you use this machine for only 1 week you still have to pay a minimum charge of 300.

so if you take the decision and hire the machine for less then 4 weeks your relevant cost is 300, because you can’t pay less then this amount.

but (suppose) if you use the machine for 6 weeks
your rental charge will be 75 X 6 = 450
it exceed the minimum charge of 300, so your relevant cost is 450. because you can not pay less then 450.

does it make sense??? if still unclear reply the point which is not understandable.

Best regards
Mahfuz

[mahfuz]

Hi rolusola, i think u can’t take P1 until u have finished all the fundamental level papers. u can take P1 but it should have to be in serial like F7 F8 F9 and P1. you can’t skip any papers from F level before you start professional level, unless u got exemption.

so F7 F8 F9 is ur paprs for december 2010.

thanks

[mahfuz]

Hi Ria,

Any salary paid to the owner or to the family of the owner of an unincorporated business is allowable unless it is not excessive.

It is very common the owner of the business will try to manipulation the profit by reducing the revenue (goods for own use) or by increasing the expenditure (salary of himself or family person) to get benefit from reduced the tax.

To prevent this kind of manipulation any extra amount of salary paid to himself or to his family are disallowed.

eg if the usual salary for performing a specific job GBP 5000, but owner or any members of his family is getting paid GBP 8000 for this job, up to GBP 5000 is allowable but extra (8000 – 5000) = 3000 is not allowable. the amount GBP 3000 should be add back to the Adjustment of taxable trading profit.

on your question it is not clear that what is the reasonable salary for this job. normally you will be told on the question what is the usual salary for this job, like the the question will mention like this…….. *The person who was doing this job was paid GBP 5000, or *a person who is doing the same job are getting GBP 5000 or *the question will directly tell you the market rate for this job is GBP 5000.
once you have got the market rate of salary you can easily find out the excessive salary

salary paid – normal salary = excesasive salary

well wisher
Mahfuz

[mahfuz]

Hi Ria,

Wish you best of luck, To have a better grasp on this topic.
I don’t know why you are asking about expense, this is not an item of expenditure it’s revenue.

This will be regarded as goods for personal/own use.

To find out the correct taxable trading profit you need to have an adjustment for this transaction.

[{This transaction will be treated as Claudia is making the sale to himself as like as third party based on market price of the goods. (otherwise he would have been able to sale this goods to other based on the market prize) there for he could make profit on this goods.}]

For the peruse of Taxable trading profit it is not allowed to exclude the amount from profit, he should add it back to the profit.

Adjustment will depend on the treatment on the account:

1) If Claudia has not not accounted for the removal of the goods, the full selling price must be added to the adjustment of Taxable treading profit. coz the purchase price is already included on the cost of sale but sales has not yet been recorded.

the full selling price of the jacket is 120 + (120×25%) = 150

2) If Claudia has accounted for the removal of the goods, he just need to make an adjustment for the profit element of the goods to the Taxable treading profit. coz the the purchase price is already included on the cost of sale and sale.

The profit element of the jacket is 120×25% = 30

*** This rule does not apply for the Services.

is it clear ??? ,,,,,,,,,,, if not reply the point.

Well wisher
Mahfuz

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