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Greetings sir. Hope you are fine.
23.2: Could please educate the solving of Task 1 ?
23.7 Could you please refresh what relevant cost signifies, and why the Interest costs of $6,000 per year which is not yet charged but a decision rather pending – would not be chosen to be termed as a relevant cost ? I felt, since it is a decision pending to select or not to select, it is a relevant cost.
Thankyou sir.
23.2
They made sales of 860. At the start of the period they were owed 45 and so will have received the cash during the three months. At the end of the period they were still owed 85 and so will not have received this cash. So the total cash received will have been 45 + 860 – 85 = 820.
Cost of sales was 600. The purchases must have been 600 because the inventory stayed the same and so they didn’t have to buy any extra. However the cash they actually paid will not have been 600 for the same reasons as with the sales. They must have paid cash of 600 + 75 – 100 = 575.
For overheads it is a bit unfair of BPP to use the word accruals because it is a financial accounting term, but it just means the amount owing. So in the same pay as for purchases, the cash paid must have been 100 + 40 – 45 = 95.
23.7
Relevant costs are costs that are relevant for the decision.
The interest paid is not relevant because the whole purpose of the discounting at is in order to account for the interest 10%.
Thankyou sir for the well written explanation. I would say – this whole 23.2 exercise belongs to the chapters of FA, and that FA should have been F2, not MA.
23.7
If you could further elaborate please, it would be appreciated. I have a hard time understanding.
Also, are points vii and ix connected or talking about different interests ? And in vii) would the “would be” indicate that the decision has yet not taken place or that it is already a sunk cost ?
I agree with you about question 23.2 and I do not think that BPP should have included a question like this.
for 23.7, points viii and ix are connect in the although you cannot be required to be able to calculate the cost of capital (that is not examinable until Paper FM), it is the cost of all money used by the company and will include the interest cost on the $6,000 borrowed in this question.
All you need to remember for Paper MA is that any interest paid is never included in arriving at the net cash flows that we then discount.
As far as vii is concerned, the first sentence at the start of the question says that they are thinking about refurbishing and upgrading. So they have obviously not yet made the decision and therefore all future extra costs are relevant to that decision.
I am sorry sir, I meant (viii) not (vii). Typo.
Would the “would be” in (viii) indicate that the decision has yet not taken place or that it is already a sunk cost as it also says “money borrowed”.
In short, has the money been borrowed or yet to be borrowed ?
If already borrowed, we consider the interest now payable on it as a sunk cost, and thus not relevant ?
Ok, I think I got it now… whether the $6000 has been borrowed or yet to be borrowed – the focus is on the Interest over it, and Interest is not a cashflow.
Am I correct ? Would you like to add anything extra to it ?
- The topic ‘MA BPP Revision Kit, Section 23: Budgeting, 23.2 Pg145 & 23.7 Pg150’ is closed to new replies.