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A company is evaluating a project that requires 4,000 kg of a material that is used regularly in normal production. 2,500 kg of the material, purchased last month at a total cost of £20,000, are in stock. Since last month the price of the material has increased by 21/2%.
What is the total relevant cost of the material for the project?
A £12,300 B £20,500 C £32,300 D £32,800Correct answer is D, 4000 kg x 8.2$
My question, why we do not exclude 2500 kg as we have it in the store? Relevant is the future incremental cost and for new project we need 4000 kg, as we have in the store 2500 so we will need to purchase only 1500 kg x 8.2$ (that’s my understanding). In the question also didn’t mentioned that inventory need to be held 🙁Given that the material is used regularly in normal production, then if we take the inventory for the new project it will need replacing (otherwise we would lose normal production).
However, relevant costing is no longer very important for Paper F2 – it was moved to Paper F5 several years ago. Are you using a current edition of your Revision Kit? If not then I do suggest that you buy one.
Thank you for reply, well noted. Refer to the edition, bpp for exams from 01.09.2016 to 31.08.2017. Even better 😉 one lesson less when i start studying F5
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