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Hello Sir,
Following is the question I have a doubt in:
A company needs 400kg of material Z to fulfil a customer order in one month’s time.
It currently has no material Z in inventory. The current purchase price of material Z is $20 per kg
and this is expected to rise to $24 per kg in one month’s time. Material Z is perishable and normally 20% of stored material is lost per month.
The company expects to have 200kg of material Y in inventory in one month’s time with no
alternative use other than to sell it for scrap for $18 per kg. The 200kg of material Y could be
converted into 200kg of material Z in one month’s time at a cost of $4 per kg. Material Y is not
perishable.In the answer,
The total relevant cost is (200kg x $22) + (200kg x $24) = $9,200
In the $22, they are even added $18. I did not understand why are we accounting for the scrap value when we can covert Y into Z at $4.Thank you in advance!
It they convert Y and use it then they will be losing the scrap proceeds of $18 that they would otherwise have received. There is therefore an opportunity cost of $18 in addition to the $4 that is spent converting it.
Have you watched 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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