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Sir yesterday someone asked you relevant costing question so I just want to clear a concept.
Your company regularly uses material X and currently has in inventory 500 kg for which it paid $1,500 two weeks ago. If this were to be sold as raw material, it could be sold today for $2.00 per kg. You are aware that the material can be bought on the open market for $3.25 per kg, but it must be purchased in quantities of 1,000 kg.
You have been asked to determine the relevant cost of 600 kg of material X to be used in a job for a customer.
What is the relevant cost of the 600 kg?
a. $1,325
b. $1,825
c. $1,950
d. $3,250In this, answer is C. He just multiplied 600×3.25=1950. It said in answer that the cost for 400 is irrelevant as it has daily use, so when we will use 400 units in future, we will consider the cost of 400 units as sunk cost as we have already paid for. So this cost of 400 units will never be considered relevant?
If a business already uses a type of material then the relevant cost of using that for another project is simply the current cost of purchasing the material needed.
Although they don’t need all 1000 kg for the new project, the relevant cost will be 600 x 3.25.
The other material will be used for existing product production. At worst we have bought an extra 400 earlier than we might have otherwise, but it is just a matter of timing.
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