- This topic has 9 replies, 2 voices, and was last updated 8 years ago by
.
- Posts
I am actually having some difficulty concerning relevant costing example 2.
1 Could you explain in words the logic of note 6? In your lectures you have mentioned that relevant costing is about working out the extra cost. How could an opportunity cost be an extra cost?
2.Concerning the overdraft, why it was not classified as an extra cost? According to me,because of the special order we have to take an overdraft(which is an extra cost) and so is the interest.
Thanks in advance.
You have obviously not watched my lectures properly, because I deal with both points in the lectures (and there is no point at all in using the notes without the lectures. If you are not watching the lectures then you need to study using a Study Text from one of the ACCA approved publishers – I am certainly not going to type out all my lectures here.)
1. An opportunity cost is lost income as a result of doing the work. If the company loses income then it is as much a cost as if they are having to pay out money. Either way, the company has less money as a result.
2. An overdraft is borrowing money and then repaying it. The only cost involved is the interest that you have to pay while the money is being borrowed.
This question is in fact a past exam question (although from a long time ago 🙂 )
C is considering whether to undertake some contract work for a customer. The machinery required for the contract would be as follows:
A special machine will have to be hired for three months for the work( the length of the work contract). Hire charges for this machine are $75 per month, with a minimum hire charge of $300
-Could you explain what does the sentence mean?
– What is the relevant cost?They are having to pay to hire (rent) the machine.
Normally they would have to pay 3 x $75 = $225, but because the minimum charge is $300 they will have to pay $300 and this is the relevant cost.
Could you explain how any fall in the resale value of machinery or other assets that an organisation owns could be a relevant costs?
It depends on the rest of the question.
Any payment to buy a machine is a relevant cost.
Any receipt of sale proceeds is a relevant cost.
If expected sale proceeds fall as a result of doing a contract then this is an opportunity cost and therefore a relevant cost.
A special job will require 20 hours of skilled labour. The skilled workforce is paid $15 per hour and is working at full capacity. If the special job is undertaken, the special labour would be taken off the work that earns a contribution of $12 per hour, after deducting the costs of the labour and variable overheads of $1.5 per hour. What is the the relevant cost?
-What does “working at full capacity” mean in this context?
-The answer is $570 and could to help me to obtain this figure because my answer and that of the book are not the same.Thanks in advance.
Please in future start a new thread when you are asking about a different question.
Working at full capacity means that they are currently working all the hours available. (Therefore doing the special job will mean taking hours away from their current work).
Every hour taken from their current work will be losing the company 12 (contribution) + 15 (labour) + 1.50 (variable overheads). So the total cost per hour = $28.50.
The logic of this is explained in my free lectures.
- The topic ‘Short term decisions’ is closed to new replies.