Relevance cost

[cost_angkor]

Dear All,

Please kindly help me to verify the relevance cost as below:

1-Material A is in stock and cost 3,000$. It was originally intended for use in a product line which has now been discontinueed. The material can now only be used for the manufacture of the subcomponents or disposed of, the latter incuring transport and other costs of $1,500.

The relevance cost is $4,500??

2-Skilled men will be required to help manufacture the sub-component, receiving pay totalling $31,000. They will be transfered from another department which will have to recruit labour as replacements, at an estimated total cost of $ 37,500 including pay and recruitment costs.

The relevance cost is $6,500 treated as opportunities cost????

3-It is intended to extend the duties of a foremen currently employed elsewhere in the factory to include the supervision of the production process relating to the manufacture of the sub-components. Around 10% of the forman's time will be devoted to the sub-components: the foreman is paid $24,000 p.a

The relevance cost is $2,400

4-Machinery currenlty lying idle will be used to manufacture the sub-components as below:
a. Original cost 5 years $45,000 not relevance cost is a sunk cost ??
b. Estimated life 10 years (Current realizable value) $15,000 is relevance cost ??
c. Estimated realizable value in one year's time after using on the order $12,000 is relevance cost??

5-General overheads are to be allocated on the basis of 100% of labour cost so it is 31,000 ???

Thanks lot for kindly help.

Regards

 

[Triest123]

1-Material A is in stock and cost 3,000$. It was originally intended for use in a product line which has now been discontinueed. The material can now only be used for the manufacture of the subcomponents or disposed of, the latter incuring transport and other costs of $1,500.

=> The relevant cost is the net realisable value $1,500 (i.e. the opportunity cost)
The purchase costs ($3,000) is the past costs, which is considered as irrelevant cost


2-Skilled men will be required to help manufacture the sub-component, receiving pay totalling $31,000. They will be transfered from another department which will have to recruit labour as replacements, at an estimated total cost of $ 37,500 including pay and recruitment costs.

=> The relevant cost is $37,500 as it can be "fully" avoided if the company do not
choose to manufacture the sub-component.

3-It is intended to extend the duties of a foremen currently employed elsewhere in the factory to include the supervision of the production process relating to the manufacture of the sub-components. Around 10% of the forman's time will be devoted to the sub-components: the foreman is paid $24,000 p.a

=> The allocated costs for the forman's time is the irrelevant cost as his salary remain
unchange (i.e. $24,000 p.a) unless his salary is adjusted due to this new plan.

4-Machinery currenlty lying idle will be used to manufacture the sub-components as below:
a. Yes. Original cost 5 years $45,000 not relevance cost is a sunk cost
b. Yes. Estimated life 10 years (Current realizable value) $15,000 is relevant cost.
c. Estimated realizable value in one year's time after using on the order $12,000 is
relevant cost??
=> I'm not sure but I think it should be relevant cost.

5-General overheads are to be allocated on the basis of 100% of labour cost so it is 31,000 ???

=> It is the irrelevant cost as it is the allocated costs.

 

[cost_angkor]

Thx lot for your clarification. What I am thinking on the #4 problem is that the relevance cost is only 3,000$ (15,000 -12,000). what do you think?