CA4023 Cost Management Accounting

CHAPTER 4 RELEVANT COSTING

1. Your company regularly uses material X and currently has in stock 500kgs for which it paid
RM1,500(sunk cost) two weeks ago. If this were to be sold as raw material, it could be sold today for
RM2.00 per kg(scrap value). You are aware that the material can be bought on the open market for
RM3.25 per kg.(current purchase price)

You have been asked to determine the relevant cost of 600 kgs of material X to be used in a job for a
customer. The relevant cost of the 600 kgs is?

In stock 500kgs; Already in stock Alternative use Regular Use Current Purchase Price
Need to purchase 100kgs; Not in stock current purchase price
600kg x RM3.25= RM1,950

2. CTH has been approached by a customer who would like a special job to be done for him, and who is
willing to pay RM22,000 for it. The job would require the following materials:

Materials Total Units Book value of units Realisable Replacement

units already in in inventory value cost
required inventory RM / unit RM / unit RM / unit
A 1,000 0 - - 6
B 1,000 600 2 2.50 5
C 1,000 700 3 2.50 4
D 200 200 4 6.00 9

Material B is used regularly by CTH, and if units of B are required for this job, they would need to be
replaced to meet other production demand.

Material B
In Stock 600 units Alternative use Regular use Current Purchase Price (RM5)
Required 1000 units (Need to purchase 400units) Not in stock Current Purchase Price (RM5)
1000 units x RM5= RM5000

Material A
Not in Stock Current Purchase Price (RM6)
1000 units x RM6= RM6000

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 CA4023 Cost Management Accounting

Material C and D are in inventory as the result of previous over-buying, and they have a restricted
use. No other use could be found for material C, but the units of material D could be used in another
job as substitute for 300 units of material E, which currently costs RM5 per unit (of which the
company has no units in inventory at the moment).

Material C
In Stock 700 units No other use Scrap Value (RM2.50)
700 units x RM2.50 = RM1,750
Required 1000 units (Need to purchase 300 units) Not in stock Current Purchase Price
(RM4)
300 units x RM4 = RM1200
Total = 1750 +1200 = RM2950

Material D
In Stock 200 units Alternative use Restricted use Higher (Scrap value/ substitute use)
Scrap Value= 200 units x RM6= RM1200
Substitute use = 300 units x RM5= RM1500 (higher so take this)

Required:
Calculate the relevant costs of material for deciding whether or not to accept the contract.
A= 1000 units x RM6 = RM6000
B= 1000 units x RM5 = RM5000
C= Total 1750 +1200 = RM2950
D= Substitute use = 300 units x RM5= RM1500

Total relevant cost = RM15450

Can accept the contract since customer willing to pay RM22,000 which is more than the relevant cost
RM15,450 by RM6550 (RM22,000-15450).

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