RELEVANT COSTS - TUTORIAL QUESTIONS

QUESTION 1

Company A is considering accepting a special project for the manufacture of 50 units of Component 124.
Materials and labour requirements are given below:

Materials: For the manufacture of component 124, 2,000 kgs of materials Zep is needed. Company A has
exactly 2,000 kga of this material in its stores. These were bought two years ago at a cost of RM6,000.
This material would have no other use and would be sold as scrap for RM2,000 if not used for the
manufacture of Component 124.

Labour: Labour costs to be incurred is RM8,000. However, labour is in short supply and if the workers
are not working on this project, they can be switched to another job which would give a contribution of
RM15,000.

What is the relevant cost of materials and labour to be included in the manufacturing cost estimate for
Component 124?

Suggested Solution:

Relevant costs:

Cost items: RM Reasons

Material: Resale value 2,000 Relevant cost as it is an opportunity cost-revenue
lost when this material used in manufacturing
Component 124.
Labour : Additional cost 8,000 Relevant cost as it is a future cost to be incurred on
labour
Labour : Contribution lost 15,000 Relevant cost as it is an opportunity cost-
Contribution lost when labour is used in this project
Total relevant cost 25,000

Note: Material cost of RM6,000 is irrelevant cost as it is a sunk cost

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RELEVANT COSTS - TUTORIAL QUESTIONS

QUESTION 2:

Ilyas Razi trades as a contractor to build cruises at the Melaka River Cruise Marina. At present, he has
just received the news that an entrepreneur in Melaka is opening the tender to build a cruise to be
named “TUN TEJA” to be delivered in one year’s time. Ilyas is interested since he has no other contract
in hand, at least for the next few months.

In order to build “TUN TEJA”, several types of material are required, as follows:

Type In stock (units) Needed for Purchase price Current Current resale
contract (units) of stock items purchase price price (RM per
(RM per unit) (RM per unit) unit)
A 1,000 10,000 7.70 21.00 14.00
B 11,000 10,000 14.00 6.30 7.00
C - 1,000 - 42.00 -
D 1,000 2,000 28.00 21.00 14.00
E 500,000 50,000 2.00 2.10 2.05

Notes on the material:

 Material A could be sold to a local trader if not used for the contract.
 Materials B and E are used regularly in this type of business.
 The business has no other use for Material D, the stocks of which are obsolete.

Required:

Calculate the relevant costs for materials that Ilyas Razi should charge its customer, based on the
information given above. Provide brief explanatory notes on each figure you included in your
calculations.

Suggested Solution:

The relevant costs for materials:

Materials: RM Notes
A 1,000 x 14.00 14,000 1
9,000 x 21.00 189,000 1
B 10,000 x 6.30 63,000 2
C 1,000 x 42 42,000 3
D 1,000 x 14.00 14,000 4
1,000 x 21.00 21,000 4
E 50,000 x 2.10 105,000 5
Total 448,000

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RELEVANT COSTS - TUTORIAL QUESTIONS

Notes:

1. Material A: Since the quantity in stock could be sold to the local trader at the resale value, the
use of such material leads to the opportunity costs of resale value forgone. The remaining
quantities are replaced at the current replacement price.

2. Material B: This material is regularly used in the business and needs replacement, thus the
current replacement cost is the relevant cost.

3. Material C: This material is specially purchased for this contract, thus relevant.

4. Material D: The stock of this material has no alternative use. It is assumed that they can be
sold at the current resale value since there still has a value even though the stock is
considered obsolete.

5. Material E: This material is regularly used in the business and needs replacement, thus the
current replacement cost is the relevant cost.