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Hello Sir,
kindly explain the meaning of this line ,regarding relevant costing taken from past paperanswer, as follow:
“Cash flows that are the same for all alternatives are not relevant”
Many thanksDear Mr.Moffat, may students answer on “Ask the tutor forums”? 🙂
aishaasad,
If you are choosing from some alternatives (for example what factory to rent for producing your products) and they all include same expenses (for example – factory rent $10,000 per month), these cash flows ($10,000) are not relevant for you – they won’t help you to decide what factory to rent.
But if one factory requires personnel delivery and others don’t – such cash flows are relevant.Thank you Katerina for your reply but I will bother u little more so does it mean that $10,000 rent will not be taken while calculating the relevant cost for a particular product shall that be simply ignored and factory rent will be incurred regardless of our decision to make it in any factory or will it be same if I am taking a contract shall it be considered as sunk cost ?
Thanks in advanceIn Katerina’s example, the rent is not a sunk cost. It is simply that if we have to choose between (say) two factories for which the rent is the same, then there is no need to include the rent when choosing between them.
If you can tell us which past paper question you are referring to, then we can give you an answer specific to that question 🙂Thank you Sir I have understood that further I want to ask what is the relevant cost in the follwing situations:
1.The $2500 additional monthly running costs of a new machine to bevpurchased to manufacturevan established product. since the newvmachine will save on labour time the fixed overhead to be absrbedvby the product will reduce by $100 per month .
Are these costs relevant to the decision to purchase new machine?2.Robertson will need to be onsite whilst the building work is performed.he therefore intends to do 800 hours of skilled work himself .the remainder will be hired on hourly basis .the current cost of skilled workers is $12 per hour.If he does not undertake the buliding work for this customer he can either work as a skilled worker for other builders @$12 per hour or spend the 800 hours completing urgently needed repairs to his own house.He has recently a quotation of $12,000 for labour to reoair his home.
what is the relevant cost for direct labour if he takes the building contract?
Many thanks Sir 🙂I will try and answer 🙂
1 If the $2500 are additional costs, the the $2500 is relevant.
However the reduction of $ 100 is not relevant. The reason for this is that simply absorbing (or charging) the total fixed overheads differently does not mean that the total fixed overheads change. Since the total does not change there is not extra cost or saving,2 Robertson has a choice. If he does the work himself then it will be costing him $12,000 (because he will need to use other people to work on his home). Alternatively he can work as a skilled worker which will earn him 800 x $12 = $9600.
He would choose the best (i.e. repair his home) and therefore the relevant cost would be $12,000
BUT I think you have left out part of the question. Better (if possible) would be to hire skilled workers to do the contract at $12 per hour, in which case this would be cheaper and so the relevant cost then would be $9,600. You have not said how many hours will be needed in total – you have only mentioned the 800 hours that he can do. The extra hours over 800 presumably will need skilled workers, but that depends on what exactly the question says.Is the relevant cost £12,000 (ignoring the latter part of the question) because he can work either on this contract or another for £9600 and therefore this is not relevant but as there is no mention of other workers available (as you point out) he has to do the work himself and therefore it will cost him £12,000 to have the repairs done to his house and this is the only relevant cost. Many Thanks
yap i actually missed out the part he needs in total of 3200 hours so remaining 2400 would be taken @$12
well i understood
thank you so much
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