ACCA PM Syllabus C. Decision-making Techniques - Relevant cost of Materials - Notes 2 / 3
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
| 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.