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I need help to understand this part of the technical article (budgeting part 4)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › I need help to understand this part of the technical article (budgeting part 4)

  • This topic has 3 replies, 2 voices, and was last updated 4 years ago by John Moffat.
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  • April 23, 2021 at 8:16 pm #618634
    farhaanm
    Participant
    • Topics: 165
    • Replies: 73
    • ☆☆☆

    “However, if the annual operating costs are considered, assuming the initial IT investment costs will be amortised, decision package 2 will bring annual savings of $34,750 (The difference between decision package 1 $171, 750 and decision package 2 $137, 000).’

    April 24, 2021 at 8:08 am #618675
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    I assume that you are happy with the calculations showing the cost of package 1 as being 216,750 and that of package 2 being 235,500, and so package 2 being more expensive by the difference of $18,750.

    However both of those calculations include the full initial costs of the equipment.

    If you remove these costs of 45,000 for package 1 and 98,500 for package 2, then the total costs change to $171,750 and $137,000. This makes package 2 cheaper by $34,750.

    April 24, 2021 at 1:43 pm #618726
    farhaanm
    Participant
    • Topics: 165
    • Replies: 73
    • ☆☆☆

    so when it is amortised it may or may not be a relevant cost in the decision package?

    April 24, 2021 at 4:23 pm #618749
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Amortising is simply depreciating. If the depreciation is included then in total it will be equal to the total initial cost.

    A question is likely to specify whether or not to include. If it does not specify, as in this question, then it is something to discuss in the answer.

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