Relevant cost of Materials

NotesQuizPaper examCBEMock

If used & replaced regularly this is their current replacement cost

But what if we have already have them in stock and won't use them regularly?

Well then we can either sell them or use them on another project

So, here the relevant cost of using them is the higher of: -

• Their current resale value

• Their alternative use value

So also if the materials have no resale value and no other possible use, then the relevant cost is nil

Relevant costing - material
Material Qty needed for contract Qty currently in inventory Original cost of qty in inv Current purchase price Current resale price
A 400 kg 200 kg $10/kg $15/kg $12/kg
B 200 kg 100 kg $20/kg $22/kg $15/kg

Material A is used regularly in the business.

Material B is no longer used and has no alternative use in the business.

The relevant cost of material is:

Material A – regularly used – replace
400 kg x $15 = $6000

Material B – 100 kgs in stock could have been sold if not used in the contract
opportunity cost = 100 kg x $15 = $1500

The other 10 0kg have to be purchased at $22
100 kg x $22 = $2200

Therefore $1500+$2200 = $3700

Please note that the original cost is a sunk cost, therefore irrelevant.

NotesQuizPaper examCBEMock