hello sir could you please help me understand and solve the following qn. i tried but i was unable to understand the soln( its a qn from bpp kit):
The following info is available for identifying the relevant cost of materials for a job for a customer. the companies management wants to wants to establish a minimum price at which it is prepared to take on the job.
MATERIAL W:
Total quantity required (KG) - 500
Currently in inventory(KG) - 0
Carrying value ($ PER KG) - 0
Realisable value per kg - 0
Replacement cost per kg($) - 8
MATERIAL X:
Total quantity required (KG) - 500
Currently in inventory(KG) - 300
Carrying value ($ PER KG) - 5
Realisable value per kg - 3
Replacement cost per kg($) - 7
MATERIAL Y:
Total quantity required (KG) - 500
Currently in inventory(KG) - 400
Carrying value ($ PER KG) - 8
Realisable value per kg - 9
Replacement cost per kg($) - 11
MATERIAL Z:
Total quantity required (KG) - 100
Currently in inventory(KG) - 100
Carrying value ($ PER KG) - 10
Realisable value per kg - 12
Replacement cost per kg($) - 15
Material Y is in regular use by the company. Materials X and Z are no longer in regular use. There is no alternative use for Material X but the 100 kg of Material Z could be used instead of 150 kg of Material V on a different job. Material V costs $9 per kg and there is currently none of this material in inventory.
What is the relevant cost of these materials for the job under consideration?
A. $10,850
B. $11,350
C. $12,200
D. $12,350
the answer bpp gave was D as follows:
Material W 500 kg × $8 4,000
Material X 500 kg × $3 1,500
Material Y 500 kg × $11 5,500
Material Z Higher of (100 × $12) and (150 × $9) 1,350
12,350
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relevant costing
10y ago#1Have you watched the free lectures on this? Because apart from one of the materials, the 'rules' are all explained in detail in the lectures.
The exception is material X, where BPP have made a mistake.
500 Kg is needed but there is only 300Kg in inventory. So the extra 200Kg has to be bought specially and costs 200 x $7. The 300 Kg that is in inventory is no longer in regular use and so the cost of using this is the lost scrap value, which is 300 x $9.
So the total cost of material X for the job is 1400 + 2700 = $4,100.
thanks for your reply. i have gone through the lecture but this qn looks quite complicated. i have understood material W as it will only be on replacement cost. but i dint get how u got 9$ as cost of lost scrap for material X . And also i did not understand for material Z and y how bpp arrived to that?
please explain john
10y ago#3Sorry - I typed too quick for material X.
The lost scrap value is $3 (not $9) and so the total cost is 1400 + (300 x 3).
With regard to Z, if the job under consideration did not exist, then for the different job they could either buy V (150 kg x $9) or they could use Z (100 kg x $12 (lost scrap)) and so they would prefer to use Z because it would cost them less.
So, if Z is used for this job under consideration, they will not be able to use it for the other job and would therefore have to buy V and pay out 150 x 9 = $1350. So this is the cost of taking Z for the job under consideration.
thanks alot john. i really appreciate your support. i have understood your explanation. its actually common sense which didn't click on me earlier but now it's clear :)
i wonder why bpp makes mistakes. they will simply confuse students.
just to ask if you know, does the f5 bpp kit have many mistakes in their solutions or just few of them?
you had mentioned something about the "errata sheet" earlier somewhere in the forums, saying that is the place where you can check where they have mentioned about their errors. where can i find that place?
10y ago#5There are a few mistakes (although not so many), and it is not only BPP - Kaplan has some mistakes in their books as well :-(
Nobody is perfect and we sometimes make mistakes, although we are able to correct them immediately whereas BPP and Kaplan only reprint the books once a year.
In the front of your Revision Kit should be details of how to log on to their website, and as far as I know there is an errata sheet on their website.
thank you john
10y ago#8Hemraj:
Assuming that you have copied the question correctly, then your answer (A) is correct.
10y ago#9Mike 0943:
You are welcome :-)
10y ago#11Oops - I (and you :-) ) have made a mistake and BPP are correct. I am sorry!
The point is that if we do just buy 1,000 of Z externally and produce the rest ourselves, then we still have all of the directly attributable fixed costs for Z of $7,000.
So with regard to the 3,000 that we could still produce ourselves, if instead we both the 3,000 externally then it would cost an extra 3,000 x (12 - 10) = 6,000, but we would save the fixed costs of $7,000.
Therefore it is better to buy these 3,000 externally as well - so a total of 4,000 externally.
I do apologise (my excuse is that i was tired - it was late here when I answered before :-) )
10y ago#13You are welcome (and thank you for the comment :-) )
10y ago#15If labour is in short supply, then the relevant cost is always the cost of labour plus the lost contribution. (For explanation as to why you need to watch the lectures on Relevant Costs.)
In this question, for product P the labour + lost contribution = 38 + 40 = $78.
Since each unit takes 4 hours (38/9.50), the relevant cost per hour = 78/4 = $19.50
So the 800 hours needed have a relevant cost of 800 x 19.50 = $15,600.
Cost other than labour are of no relevance (except insofar as they are needed to calculate the lost contribution).
10y ago#17That is precisely what I wrote in my previous reply.
Read the last sentence of my previous reply. The contribution is relevant, costs other than labour are not relevant costs themselves - they are only needed to calculate the contribution.
Contribution is always calculated by subtracting all variable costs from the revenue !
Again I really do suggest that you watch the lecture.
10y ago#19I have to apologise again, because I did not read carefully enough. (The problem is that because I teach several papers I am answering around 100 questions a day at the moment in my spare time from work, although I appreciate that is not much of an excuse :-( )
The BPP answer is correct, and it is because the variable overheads are being charged per hour.
You have not answered as to whether you actually have watched the lecture, but here is an illustration that might help you.
Suppose labour is current being used making another product which takes one hour to produce and has the following:
Revenue per unit: 100
Materials: 50
Labour (at 10 per hour) 10
Var o/hs (at 5 per hour) 5
Therefore contribution of $35 per unit
If the labour is taken away and used on another project, then the labour and variable overheads will (in total) stay the same because they will still have to be paid.
However, the revenue from the other product will be lost. Also, the materials from the other product will be lost as well.
So what they will lose is 100 - 50 = $50 per hour.
This is the same as the lost contribution of 35 plus the labour (10) and the variable overheads (5).
So, again, the BPP answer is correct. However it is unusual in the exam for variable overheads to be mentioned on an hourly basis - usually this is not the case in which case it is just the labour cost plus the lost contribution.
10y ago#21I am happy that it now makes sense to you :-)
Hi John,
The management accountant of a company has prepared a preform for a minimum tender price the cost in profit Ma is 2m and in notes it says. In case of labour. If the contract was lose the. All of the current staff would me made redundant . Labour is at full capacity. Redundancy cost are estimated to be $50000 now or 60,000 in one year time which one is a relevant cost to be considered as a relevant cost.
Secondly if the current contract is lost then machinery sold for 6000 now or 4500 in one year which one is relevant to the decision and do we add the machine cost as a positive number or negative?
Thanks
Noureen
10y ago#23It is impossible for me to answer about whether to take the amount now or in 1 years time, without seeing the whole of the question.
With regard to the machinery, then the sale proceeds are a cost (and opportunity cost) but again, I can't say which one to use without seeing the whole question.
What puzzles me a bit is that presumably you have an answer in the same book as the question, in which case does the answer not explain the reasons for choosing the figures that they have taken?
5y ago#25Are you referring to a specific question (and if so which one) or are you asking in general.
If you are asking in general then I explain what should be included as relevant costs in my free lectures on this.
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