Question 1

a.(i). Formula
Notes
$
1 Engineering specification 3 days x $500 per day = 1,500

2 Direct material A 61,500

10,000 sqm x $(6 + 6.30)/ 2 =

3 Direct material B 250 m x $10 = 2,500

4 Components (500 x $8 x 150%) = 6,000

5 Skilled labour 1,000 hrs x $12.5 per hour = 12,500

6 Supervision ($42,000/12 mths) x 10% = 350

7 Machine hire 5 days x $500 per day = 2,500

1,000 hrs x $220,000 / (80% x

8 Overhead costs 50,000) = 5,500

Revised relevant cost

Notes Explanation
The engineering specification costs of RM 1,500 is a sunk cost, which has been incurred regardless o
1
be excluded from the valuation

Material A is in stock, but it is regularly used by POR company. Once the contract starts, a replaceme
2
of Material A of $70,000 (10,000 x $7) is the future incremental cash flow for the work. It is treated a

Material B is not in stock and must be purchased specifically for the work. However, since the minim
3
Material B. Therefore, the purchase cost of Material B of $3,000 (300 x $10) is the future incrementa

Option 1:
Manufacture internally at a total cost of $4,450 [(variable production cost of components: 350 x $8)
or
4 Option 2:
Purchase externally at a total cost of $7,000 (500 x $14).
Since it is cheaper to manufacture the components internally, manufacturing costs of $4,450 will be
cost and should be included in the valuation.
Option 1:
Hire workers at a total cost of $15,000 ($15 x 1,000).
or
5
 5 Option 2:
Transfer existing workers and hire the temporary replacements at a total cost of $14,000 ($14 x 1,00
Since it is cheaper for PQR to transfer existing engineers from their existing duties to the project and
be considered as the future incremental cash flow for the work. It is treated as relevant cost.
The supervision costs of $350 ($42,000/12 x 10%) is not the future incremental cash flow for the pro
6
irrelevant costs.
Option 1:
Hire the machine for the entire month and then sub-hire the machine for 20 days. This wiil let PQR co
or
7 Option 2:
Hire the machine on the days it requires at a total costs of $2,500 ($500 x 5).
Since it is cheaper to hire the machine for the entire month, the hiring costs of machine of $2,000 wil
cost.
8 Fixed production overhead costs of $4,400 [$220,000/ (80% x 50,000) x 1,000] is committed cost. It i

b.

c. Factors:
Whether the company has other better opportunities to utilize available spare machine capacity.
Whether the contract acceptance would result in further repeat or new market orders.
 a.(ii). a.(iii).
$
No, because it is a sunk cost. 0

No, because the prices of $6 and $6.30 are considered as 70,000 ($7 x 10,000)
sunk cost. Since the material is regularly used, the relevant
cost is the replacement cost.
No, because there is a minimum order of 300 metre. 3,000 ($10 x 300)

No, because it contains a profit elememt of $4 which is the 4,450 (350 x $8) + ($8 + $3) x 150
mark-up profit.
No. This is irrelevant since the existing worker will still be
14,000 (1,000 x $14)
paid the same amount regardless of the new job.

No. Since the supervisor salary remains unchanged, the 0

relevant cost is zero.
No, because there is a cheaper option which is to rent full 2,000 ($5,000 - $150 x 20)
month and sublet when not in used.

0
No. Since this overhead cost is not specific for the job.

93,450

Explanation
which has been incurred regardless of whether the project has started or not. It is treated as an irrelevant cost and should

nce the contract starts, a replacement of 10,000 square metres of Material A is required. Therefore, the replacement cost
cash flow for the work. It is treated as relevant cost.

the work. However, since the minimum order size is 300 metre lengths, PQR company needs to purchase 300 metres of
(300 x $10) is the future incremental cost for the work. It is treated as relevant cost and should be included in the valuation.

tion cost of components: 350 x $8) + (150 x $11)].

anufacturing costs of $4,450 will be considered as the future incremental cash flow for the work. It is treated as relevant
at a total cost of $14,000 ($14 x 1,000).
eir existing duties to the project and hire temporary replacements at a cost of $14 per hour, the labour costs of $14,000 will
t is treated as relevant cost.
ure incremental cash flow for the project because the supervisor will work overtime which is unpaid. It is treated as

hine for 20 days. This wiil let PQR company to incur a cost of $2,000 ($5,000 - $150 x 20).

0 ($500 x 5).
hiring costs of machine of $2,000 will be considered as the future incremental costs for this work. It is treated as relevant

,000) x 1,000] is committed cost. It is treated as irrelevant cost of the project.

ailable spare machine capacity.

or new market orders.
$8 + $3) x 150
Question 2
Material X
Option 1:
Current supplier
(RM 5 x 300) + (RM 200 x 2) = RM 1,900

Option 2:
Alternative supplier
(RM 5 x 300) + RM 150 = RM 1,650

John should choose to purchase material X from his alternative supplier rather than
current supplier because it is cheaper. The relevant costs of material X for the job is
RM 1,650.
Question 3
Skilled labour
Option 1:
Current worker to work overtime
(RM 20 x 540 x 1.5) = RM 16,200

Option 2:
Hire external skilled labour
(RM 26 x 540 x 100/90) = RM 15,600

Schooling Sdn. Bhd. should choose to hire external skilled labour to manufacture the
machines instead of requiring their existing workers to work overtime because it is
cheaper. The relevant cost of manufacturing the ordered machine is RM 15,600.
Question 4
Specialized machine
Option 1:
Purchase the machine immediately
(RM 40,000 - RM 30,000) + RM 5,000 = RM 15,000

Option 2:
Hire the machine from a lessor
(RM 1,800 x 7) + RM 5,000 = RM 17,600

CLOY Sdn. Bhd. should choose to purchase the machine immediately instead of hiring
the machine from a lessor because it is cheaper. The relevant cost of using the
specialized machine to be charged to the new project is RM 15,000.
Question 5

The fight assistants' salaries are direct labour costs which are the variable costs. Therefore, it is the relevant c
1
Bhd's decision to drop the flight route to Bangkok.

The baggage loading and flight preparation expenses are committed costs that will incur irrespective of what
2
Therefore, it is irrelevant cost for Air Malaysia Bhd's decision to drop the flight route to Bangkok.

Aircraft lease is avoidable cost that can be avoided if the aircraft is not used. Therefore, it is relevant cost for
3
decision to drop the flight route to Bangkok.

Pilot salaries are committed costs that will incur inrespective of what decision is taken now. Therefore, it is ir
4
Malaysia Bhd's decision to drop the flight route to Bangkok.
osts. Therefore, it is the relevant cost for Air Malaysia

hat will incur irrespective of what decision is taken now.

ht route to Bangkok.

Therefore, it is relevant cost for Air Malaysia Bhd's

on is taken now. Therefore, it is irrelevant cost for Air

Question 6
Product B Product T Product S
RM RM RM
Sales 500,000 600,000 125,000
C/s ratio 20% 25% 40%
Contribution 100,000 150,000 50,000
Less: Fixed costs
Profit
Total RM
RM

300,000
(200,000)
100,000