- August 22, 2020 at 3:47 pm #581513Holmes1308Member
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Shoe Co, a shoe manufacturer, has developed a new product called the ‘Smart Shoe’ for children, which has a built?in tracking device. The shoes are expected to have a life cycle of two years, at which point Shoe Co hopes to introduce a new type of Smart Shoe with even more advanced technology. Shoe Co plans to use life cycle costing to work out the total production cost of the Smart Shoe and the total estimated profit for the two?year period. Shoe Co has spent $5.6m developing the Smart Shoe.
The time spent on this development meant that the company missed out on the opportunity of earning an estimated $800,000 contribution from the sale of another product.
The company has applied for and been granted a ten?year patent for the technology, although it must be renewed each year at a cost of $200,000. The costs of the patent application were $500,000, which included $20,000 for the salary costs of Shoe Co’s lawyer, who is a permanent employee of the company and was responsible for preparing the application.
The following information relating to the Smart Shoe is also available for the next two years:
Total ‘Smart Shoe’ Revenue $34.3m
Sir this is an extract from a question. We are exepcted to calculate lifetime costs arising from the product. Why is 20000salary of permanent employee included in the calculation? if we apply relevant costing principle then its a committed cost and should not be includedAugust 22, 2020 at 3:55 pm #581519John MoffatKeymaster
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In real life there can be occasions when we might decide to ignore some non-relevant costs.
However the examiner has made it clear that for the exam life-cycle costing is not a relevant cost exercise and that we should include all costs over the life of the product.
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