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Relevant Costing

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Relevant Costing

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • May 30, 2021 at 11:26 pm #622351
    simran98
    Member
    • Topics: 17
    • Replies: 18
    • ☆

    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!

    May 31, 2021 at 8:30 am #622384
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51574
    • ☆☆☆☆☆

    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.

  • Author
    Posts
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