1. Cost Accounting
Decision Making
Lecture-43
Main Ahmad Farhan

2. Relevant Cost of Material
The relevant cost of raw materials is generally their current replacement cost, unless the material have already been purchased and would not be replaced once used.
In this case recoverable amount will be its relevant cost.

3. Recoverable Amount
Recoverable amount is the higher of realizable value or the value it will be used as an alternative decision.

4. Book value of units in stock
Question
ABC company performs a job for a manufacturing of an office tables and has been received a special job by a customer who is willing to pay Rs. 82,000. The job will require the following materials:
Material
Total units required
Units already in stock
Book value of units in stock
Realizable value
Wood
4,000 Sq ft
----
---
Glue
1,000 Lbs
600 2
2.5
Bolts
1,000 Pcs
700 3
Polish
200 Lbs
200 4
6.00
Replacement cost
200 5 4 9
First Wood , second glue than bolts than polish will appear
Than 4000, 1000, 1000, 200 ,0 600,700, 200, ---,2,3 and so on

5. Question
Glue is used regularly and if glue is required for this job it would need to replace d to meet other production demand.
Bolts and polish are in stock as the result of previous over buying and they have a restricted use. No other use could be found for Bolts, but the Polish could be used in another job as substitute for 300 lbs of paint, which currently cost Rs. 5 per unit (of which the company has no units in stock at the moment)
Required: Calculate the relevant costs of material for deciding whether or not to accept the job.

6. a). Wood has been purchased in full at the replacement cost of Rs
a). Wood has been purchased in full at the replacement cost of Rs. 200 unit.
= 4,000 x 200 = 8,00,000
b). Glue is used regularly by the company. There are existing stock 600 units if these are used on the contract under review a further 600 units would be bought to replace them. Relevant cost are therefore 1,000 units at the replacement cost of 5 per unit.
c). 1,000 units of Bolts are needed and 700 are already in stock. If used for the contract, a further 300 units must be bought at Rs. 4 each. The existing stocks of 700 will not be replaced. If they are used for the contract, they could not be sold at Rs each. The realizable value of these 700 units is an opportunity cost of sales revenue for gone.
Realizable value = 700 x 2.5 = 1,750
Replacement cost = 300 x 4 = 1,200
2,950

7. d). The required units o polish are already in stock and will not be replaced
Realizable value Polish = 200 x 6 = 1,200
Value use in paint = 300 x = ,500
Higher recoverable amount 1,500

8. e) Summary of relevant cost:
Wood 8,00,000
Glue ,000
Bolts ,950
Polish , ,09,450
The price of project is Rs. 8,20,000. so accept the project.

9. Question
ABC company is currently deciding whether to undertake a new contract of 20 hours of labor will be required for the contract. The company currently producing product S the standard cost details of which are given below:
Standard Cost Card
Product S
Rs/unit
Direct Material
Direct Labor
500
Selling Price
Contribution margin

10. Question Requirement:
a) What is the relevant cost of labor if the labor must be hired from outside the organization.
b) What is the relevant cost of labor if the company expect to have 5 hours spare capacity.
C) What is the relevant cost of labor if the labor is in a short supply.

11. Solution
a) Where labor must be hired from outside the organization, the relevant cost of labor will be the variable cost incurred.
20 hours x 25 per hour = 500
It is assumed that the 5 hours spear capacity will be
b) Relevant cost of labor on new contract
Direct labor (15 hrs x 25) 375
Spare capacity (5 hrs x 0) 0
Relevant cost

12. Solution
c). Contribution margin earned per unit of product S produced = Rs 200
Rs 200 / 12 hrs = 16.67
Relevant cost of labor on new contract:
Direct labor (20 hrs x Rs 25)
Contribution margin lost by not making product (20 hrs x Rs 16.67)
833.33