CHAPTER 9 RELEVANT COSTING

A. Relevant Cost

- Cost that will change due to the alternative decision made considered.
- These cost need to be considered when making a decision.
- Future cost which differs between alternative.
- Additional cost which will be incurred /spent by the decision made.
-Will not include sunk cost, past cost, historical cost as these cost are irrelevant cost.

Relevant Cost (future cost)

1. Disposal cost of material

a) if material is not used in a job or contract it would have to be disposed off at a cost of RM5
for 100kg.

-disposal cost of cleaning before you throw away so you save money as such it is a saving RM5
x 100kg = R500.

- if material has to be disposed then it is not a saving RM5 x 100kg = R500.

2. Future purchase price.

3. Replacement price.
4. Current price/market price is used if no replacement or future price.
5. Must be a variable cost/marginal cost.
6. If material could be sold- do not use book value, use current market price.
7. If material is used in contract regularly -do not use book value, use replacement/future price.

2. Opportunity costs (would/could/should key words)

The second best alternative forgone . Any income, contribution or profit that is let go.

Examples
1. Could have sold materials for RM100.
2. Mr X could have earned interest of RM100 from project A orRM200 from project B.
Opportunity cost will be RM100 project A as this is an income forgone.
3. By accepting the contract John will lose a rental on the premise of RM 200. The opportunity
cost is RM200.
3. Labour Cost

Direct labour cost for the job. contract must a variable cost

Examples
1. variables cost.
2. labour cost paid for another contract as a result of taking their workers.
3. cost of labour diverted from one job to anther only if it is related to current job.
4. cost of temporary workers.
5. over time.

calculation time -and - a half

time -and - a quarter
time - and - a third

Example Mr X working hours are 50 hours at RM2 per hour. He works 60 hours for this month.
What is his salary with over time calculated at time -and - a half

basic ( 50 x RM2) = RM100

O.T (10 x RM2 x 1.5) = RM30 (relevant)
total wages/salary RM130

6. increase in wages of an employee example

previous- RM4 x 3 hours=RM12

Now -RM7 x 3 hours = RM21
Relevant cost is the differences = RM9

4. Variable overhead

5. Fixed cost only if it is specifically for the job/work/contract

6. Special cost spent for the job/work/contract

Examples
1. Packaging cost
2. Extra overhead
3. penalty, fine.
4. Special request

7. Incremental cost (differences in cost)

Example salary increased by RM 60 ( before 40 hours at RM7.50) - (now 40 hours at RM9.00
8. Avoidable cost
Example pay Jack RM9,000 for a job , if he is needed now for the job then he will be paid
RM3,000. Avoidable cost is RM6,000

9. Differential cost
Example
Sell Non-current asset now RM8,000
Sell 1 year later RM600
differential cost (loss) RM7400

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B. Irrelevant Cost (Sunk Cost, Past Cost, Historical Cost )

1.Materials

1) materials in store already bought.

2) materials in store bought in the past like yesterday, last week, last month, last year etc
Example 1
Bought material for RM3.00 (irrelevant), currently price of material is RM2.30 (relevant),

Example 2
Bought material for RM3.00 (irrelevant), currently price of material is RM2.30 (irrelevant),
price of material might increase to RM2.35 (relevant).

2. Labour
Monthly fixed salary.

3. General fixed overhead already allocated, apportioned unavoidable Committed Cost or

Unavoidable cost

4 Research &development bought /spent /incurred

5. Machine cost bought /spent /incurred

6. Accounting conventions
Examples
-Assets already bought
-Depreciation
-Book value
-Bad debts
MQQ questions example

1. A company purchased a machine several years ago for $50,000. Its written down value
is now $10,000. The machine is no longer used on normal production work and it could
be sold now for $8,000. A project is being considered which would make use of this
machine for six months. After this time the machine would be sold for $5,000.

What is the relevant cost of the machine to the project?

A $2,000
B $3,000
C $5,000
D $10,000

2. The following statements relate to relevant cost concepts in decision-making:

(i) Both Materials and labour can have an opportunity cost

(ii) The annual depreciation charge is not a relevant cost.
(iii) Fixed costs would have a relevant cost element if a decision causes a change in
their total expenditure.

Which statements are correct?

A (i) and (ii) only

B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)

-THE END-