Relevant Costing Only in Difficult Situation

USD 93,000 Steel 26,400

Steel Ring 66,600

Cost of Steel ring whatever

What is mean by Strategy? Choice of closing the door

1 Want to have more contribution by selling P
2 Want to have more contribution by selling P
3 Want to have more contribution by selling P

Purchase price of existing steel Inventory - Sunk Cost

Market Share is prefered to profit, to be a market leade

Realisable Value of Dead Stock (Stock not to be used)

Sale Value of Existing Steel & remaining Steel Rings (

Option 3 3.5 Months (14 weeks) sell Steel Ring

Remaining Steel Rings (66,600 - 9,660)

Relevant Costing does not differentiate Fixed & Variab

Cost or Gain which are common between multiple opt
Sunk Cost (Purchase price of existing Inventory) is no
Overhead cost not specific to any product (Fixed Overh
Cost of buying the machine is irrelevant here since it i
Interest cost on buying a machine early is relevant
Increased contribution by buying a machine is the gai
Wages for labour at 70% will be paid under all the opt
Conversion cost of Steel Ring is irrelevant since decisi
Gain calculated using Relevant Costing will be achiev
Relevant Costing Considers only the Cash Outflow &

3.5 Months Steel Ring Contribution

Installation Cost of Plastic Ring
Investment happens in
Conversion Cost
70% of your Labour cost
Contribution from Steel Ring
Scrap Sale Value of 15,581 Steel Rings
Contribution gain 128.61 from 100 plastic ring

Revised Contribution due to Reduced Labour Cost in Sl

Sale Price
Less: Material Cost
Less: Labour Cost
Less: Department OH
Contribution
Additional Contribution

When will a Cost become Variable?

When a Cost changes based on
When will an Overhead Become Variable?
Overhead will be variable based on variabil
Variable Overhead
Tea Expenses
PF
Lubrication Oil
 ficult Situation

3.5 Months Sales 25,241.61

ce of closing the doors

tribution by selling Plastic ring
tribution by selling Plastic ring
tribution by selling Plastic ring

ventory - Sunk Cost

, to be a market leader in long run

Stock not to be used) will be relevant for decision making

maining Steel Rings (15,581) should be considered for decision mak

eeks) sell Steel Ring 14 X 690

Rings (66,600 - 9,660)

ntiate Fixed & Variable Cost

etween multiple options are ignored
ing Inventory) is not considered for decision making
product (Fixed Overhead) is not considered for decision making
levant here since it is common between Option 2 & 3
early is relevant
a machine is the gain which will offset the interest cost
aid under all the option chosen and hence irrelevant
relevant since decision is to be taken based on completed rings
osting will be achieved in Cash
the Cash Outflow & Cash Inflow

Option 3 Option 2
3.5 Months Steel Ring 25241 Ring produ

(1,800) (1,800)
3.5 Months After 1 year

Gain
plastic ring 15,581 X 111.76 / 100

ced Labour Cost in Slack Period

Plastic Ring Steel Ring
320.40 320.40
rial Cost (4.20) (76.65)
ur Cost (10.92) (32.76)
rtment OH (8.74) (26.21)
296.54 184.78
Contribution 111.76

ased on Unit of production

ariable?
ble based on variability of its Base
verhead Base
Number of Workers
Number of Workers X Wages paid
Working Hours
 Existing inventory is ignored as it is Sunk Cost
No Profitability
Get More Plastic Ring Market

decision making

9,660
15,581

on making
eted rings

1 Ring production

r 1 year 8.5 Months interest USD 1,800

Variable overhead is 40% of Direct Labour Cost

Plastic Ring - Variable OH = 31.20 X 40% = 12.48
Since 70% of labour cost is going to be paid,
Variable OH based on labour cost will also be 70%
12.48 X 70% = 8.74
Wages paid