ExpertMedium2 marksMultiple Choice
ACCA · Question 6 · Relevant Costing
Section A
EventPro is quoting for a one-off festival. The project requires 500 kg of Material Z. EventPro currently has 300 kg of Material Z in inventory, originally bought for $10/kg. Material Z is in regular use by EventPro for other events. The current replacement cost of Material Z is $12/kg, and its scrap value is $8/kg.
What is the relevant cost of Material Z for this one-off festival quote?
Section A
EventPro is quoting for a one-off festival. The project requires 500 kg of Material Z. EventPro currently has 300 kg of Material Z in inventory, originally bought for $10/kg. Material Z is in regular use by EventPro for other events. The current replacement cost of Material Z is $12/kg, and its scrap value is $8/kg.
What is the relevant cost of Material Z for this one-off festival quote?
Answer options:
A.
$4,400
B.
$5,000
C.
$5,400
D.
$6,000
How to approach this question
Determine if the material is in regular use. If yes, the relevant cost is always the current replacement cost, regardless of what is in inventory.
Full Answer
D.$6,000✓ Correct
For materials in regular use, the relevant cost is the current replacement cost. Using the 300 kg currently in inventory means the company will have to replace it to fulfill its regular operations. Therefore, the entire 500 kg must be valued at the replacement cost of $12/kg. 500 × $12 = $6,000.
Common mistakes
Valuing the existing inventory at scrap value ($8) or historic cost ($10). Scrap value is only relevant if the material has no other use.
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