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In your example on relevant costing there is a requirement about overdraft of 20.000 and interest of18%. There is a period of 3 months for the project. and 20.000 is required only for this period. Why is it then not included in calculation of costs? is it not a relevant cash flow. If the overdraft would be taken say for a year, then it would not be relevant, as will pay after a year anyway. What about the inerest? it will be payable after 3 months only?
Then imuted interest is relevant. Or is it not imputed interest?Thanks.
The overdraft itself is not included because there is no mention of the 20,000 being spent on anything. (Presumably the overdraft is needed to finance some of the spending that is included, such as the cost of the sub-contractor.).
The interest is a relevant cost because we would not be taking the overdraft and therefore not be paying the interest if we did not do the contact.
Have you looked at the answer at the back of the course notes?
this is the answer:
Full opportunity costing will also allow for imputed interest costs on the incremental loan. The correct interest
rate is the overdraft rate since this represents the incremental cost the company will pay. Simple interest charges
for three months are therefore: (3/12) × $20,000 × 18% = $900.sorry but it is not clear, what is meant under full opportunity cosling in this case especially regarding imputed interest cost, which is normally not relevant.
thanks.
They are only taking the overdraft because of doing the contract, and therefore the interest is only payable because of doing the contract. There is therefore an extra cost which needs including. (The word imputed should maybe not really be used here – it is actual extra interest that is payable as a result of doing the contract)
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