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I have few question regarding relevant costing.
1) Note 5. In machine overhead we have only 4000 hrs available, for remaining 2000 hrs we need to take off existing job.SO why we are calculating 6000 hrs @ 3?. We need to pay only extra electricity bill of 4000 hrs and for remaining 2000 hrs weather or not we are using it on special project we are actually using it on existing project so it means we are already paying it like we are paying supervisor fixed salary.So 2000 hrs is not incremental cost.
2) Note 6. We already have 7500 kg which cost us $34000. if we sold our material we receive only $31500 so technically it is loss for us. Now we are charging $34000 which save us from loss. So how $31500 is an opportunity cost?
3) we are taking bank overdraft of $20000 specially for this special project. If we dont do this project we are not going to take loan from the bank. SO why we are not including $20000 in relevant cost calculation why only take interest only?
It would seem that you are using the lecture notes without watching the free lectures that go with them. I work through all the examples in the lectures and explain all of the points that you are asking about.
If you are not watching the lectures for any reason then you should not use the lecture notes – instead you must buy a Study Text from one of the ACCA approved publishers and study from there. The notes are only lecture notes and it is in the lectures that I explain and expand on the notes.
Please watch the lectures, and if you are then still unsure about any of your three points then do ask again.
(The answer in the notes is correct 🙂 This example is actually from a past exam question of many years ago.)
No sir i did watch your lecture. I will rewatch it again. But these are the confusions i have about it.i beleive answer in lecture notes are 100 percent accurate i just need clarity about certain points
sir i watched your lecture again and you have already clear my confusion regarding point 2 and point 3. Sorry for asking question without proper understanding your lecture…its good to have teacher like you……I would be very greatful if you just clear my POINT 1. Thankyou 🙂
You are obviously happy with the cost of the 4,000 hours and it is the other 2,000 hours that are worrying you.
Just suppose that the existing work was taking 1 hour per unit, that the selling price was $10 per unit, materials $6 per unit, and electricity $3 per unit. So a contribution of $1 per unit.
If we take away 1 hour from the existing work, then we lose the revenue of $10. We save the materials of $6 per unit. The electricity is still payable. So we lose a net 10 – 6 = $4 per unit. This is (and always would be) the same as the contribution ($2) plus the electricity ($3).
Hope that helps 🙂
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