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Good evening, sir you must be aware of the Kaplan kit question of furnival which is related to relevant costing and the question number is 196 in kit I am having a problem with that question sir in part A firstly it is not taking the joint cost and secondly while calculating the opportunity cost they are taking the 10 percent of 3000 which they are referring to ($30 per hr * 10 hr) I wanted to know from where are they getting this $30 per hour.
And sir in part B after computing the net gain of contribution they are subtracting an extra cost of q which is according to Kaplan (300*1) from where did we get this extra cost and why are we subtracting it??
can you please explain me both of these queriesThank you.
Mujahid AslamI am not aware of the question Furnival because I do not have the Kaplan kit (I have the BPP Revision Kit), and therefore I cannot help you with their answer.
(Have you watched my free lectures on relevant costing? Our lectures are a complete course for Paper F5 and cover everything needed in order to be able to pass the exam well.)
Good day Sir. I hope you can help me to understand this …
UU Company has been asked to quote for a special contract.
Material X:
Book value: $5.00 per kg
Scrap value: $0.50 per kg
Replacement cost: $5.50 per kgThe contract requires 10 kg of Material X. There are 250 kg of this material is I inventory which was purchased in error over two years ago. If Material X is modified, at a cost of $2 per kg, it could then be used as a substitute for material Y which is in regular use and currently costs $6 per kg.
What is the relevant cost of the materials for the special contract?
Please could you write an answer and explain why is it?
Thank you
Surely you have an answer in the same book in which you found the question? (If not, then you should be using books from one of the ACCA approved publishers – they do have answers!)
In future you should say what problem you are having with the printed answer and not simply require an answer.
If they did not use the material in the contract then they could modify it and use it instead of Y and therefore save 6 – 2 = $4 per kg.
This is better than scrapping and only getting $0.50, and is cheaper than buying new at $5.50. Therefore the relevant cost is the opportunity cost of $4 per kg.
Have you watched my free lectures? They are a complete course for Paper F5 and cover everything needed to be able to pass the exam well.
Hi John,
Ennerdale has been asked to quote a price for a one-off contract. The company’s management accountant has
asked for your advice on the relevant costs for the contract. The following information is available:
Materials
The contract requires 3,000 kg of material K, which is a material used regularly by the company in other production.
The company has 2,000 kg of material K currently in inventory which had been purchased last month for a total
cost of $19,600. Since then the price per kilogram for material K has increased by 5%.
The contract also requires 200 kg of material L. There are 250 kg of material L in inventory which are not required
for normal production. This material originally cost a total of $3,125. If not used on this contract, the inventory of
material L would be sold for $11 per kg.
Labour
The contract requires 800 hours of skilled labour. Skilled labour is paid $9.50 per hour. There is a shortage of
skilled labour and all the available skilled labour is fully employed in the company in the manufacture of product P.
The following information relates to product P:
SP 100
Labour 38
other VC 22
Profit 40.
Prepare calculations showing the total relevant costs for making a decision about the contract in respect of
the following cost elements: Materials K,l and Labour.a) Regarding the materials, why I need to calculate relevant costing taking into account all the 3000 Kgs instead of 1000 extra we buy? It says that we use it regularly and we have 2000 in inventory. Isnt it sunk cost?
b) Regarding labour,I found the opportunity cost of $8000. I checked the solution and on top of this cost, labour cost of $7600 (800*9.5) is added up. Why? We would pay this amount to the workers anyway. Why is it relevant cost?
Thank you! I apologize for the long text.
I don’t think you can have watched my lectures on relevant costing 🙂
(Our lectures are a complete course for Paper F5 and cover everything needed to be able to pass the exam well).Since the material is in regular use, anything taken from inventory needs replacing and therefore should be charged at the replacement cost. (It is only the original cost that is a sunk cost and is therefore not relevant).
The labour itself is payable anyway. However by taking the workers away from other work we lose the revenue from the other work and also save the other variable costs. The net of these is the same as the contribution plus the labour cost.
Again, I deal with (and explain) examples of both of these problems in my free lectures.
Thank you very much for your answer John. I am using Kaplan book and I wasn’t sure about answer in the book. I did not look at it as an opportunity cost … but now it’s clear.
Thank you again.
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