Forums › ACCA Forums › ACCA PM Performance Management Forums › Relevant cost issue
- This topic has 1 reply, 2 voices, and was last updated 6 years ago by John Moffat.
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- August 31, 2018 at 1:26 pm #470519
Hello everyone, I am stucking at this question from Mock exam of BPP about relevant cost, the question is:
“Search Co would also need a computerised operating system called ‘Check 2’. The current market price of Check 2 is $12,800, although I Co has an older version of the system, ‘Check 1’, in inventory, which chould be modified at a cost of $5,800. I Co paid $4,500 for Check 1 when it ordered it in error 2 months ago and has no other use for it. The current market price of Check 1 is $5,000, although if I Co tried to sell the one they have, it would be deemed to be ‘used’ and therefore only worth $3,500.
What is the relevant cost of the computerised operating system?”
The answer is $9,300.
Explaination:
If check 1 was not used it could be sold for $3,500 -> $3,500 are relevant
In order to used it must be modified at a cost of $5,800 -> $5,800 are relevant
Therefore, the total of $9,300 (=$3,500+$5,800) are relevantI think, in this case, ‘Used’ and “Not used” are 2 separately options. So, it should be:
‘Used’ option: Relevant cost is $5,800 (which have to pay for modifying)
‘Not used’ option: Relevant cost is $9,300 (= $12,800 – $3,500)
– Cost for purchasing ‘Check 2’ system: $12,800
– Gain on proceeded of ‘Check 1’ system: $3,500However, the explaination of BPP above is sum of the figures of 2 options. Why did they do that? Can anyone explain it to me more clearly, please?
Thank you!!
August 31, 2018 at 3:29 pm #470533If they buy check 2 then they will pay 12,800.
If the use Check 1 instead, then they will have a direct cost of 5,800 to modify it, and an opportunity cost of the lost sale proceeds of 3,500. So a total cost of 9,300.
They will choose the cheaper option, which is to use Check 1, and the relevant cost is therefore 9,300.
I do suggest that you watch my free lectures on relevant costing. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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