- This topic has 1 reply, 2 voices, and was last updated 6 years ago by
.
- Posts
Hi, please assist I thought the answer will be Replacement cost since the material is needed in the business but the correct is Opportunity Cost.
What material is needed for a project is held in stock, but is both scarce and needed elsewhere in the business, what is its relevant cost for decision making?
A. Purchase cost
B. Replacement cost
C. Net realizable value
D. Opportunity costHi – the exception to the rule regarding ‘regularly used’ materials being valued at replacement cost – is when the material is scarce and so cant be easily replaced ( basically there is a shortage).
In this case, the use of the material on the project will prevent its possible use elsewhere in the business – resulting in lost contribution from the other projects not fulfilled – therefore this lost contribution (opportunity cost) needs to be factored in as relevant cost of using the material here.
Hope this helps!
Cath
- You must be logged in to reply to this topic.