Relevant Cost and Decision Making

Feb 11, 2012
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Dear everyone,

I am very new in accounting skill. I just start learning the course. Now I have an exercise even I try to read and read, I can't still understand, could you please help me?

You have just been appointed as a costing executive for Zee Zee Sdn Bhd. The management accountant informed you that Zee Zee Sdn Bhd has been invited to supply sub-components for a period of one year at a price of RM50,000. The costing department has produced the following data and estimates relating to the manufacture of the sub-components:

(1)Material A is in stock and cost RM3,000. It was originally intended for use in a product line which has now been discontinued. The material can now only be used for the manufacture of the sub¬components or disposed of, the latter incurring transport and other costs of RM1,050.
(2) Material B will have to be ordered, the current replacement cost is RM2,100.
(3) Skilled men will be required to help manufacture the sub-component, receiving pay totaling RM31,000. They will be transferred from another department which will have to recruit labour as replacements, at an estimated total cost of RM37,500 including pay and recruitment costs.
(4) It is intended to extend the duties of a foreman currently employed elsewhere in the factory to include the supervision of the production process relating to the manufacture of the sub-components. Approximately 10 per cent of the foreman's time will be devoted to the sub-components: the foreman is paid RM24,000 p. a.
(5)Machinery currently lying idle will be used to manufacture the sub-components. Details of the machinery are:

Original cost 5 years ago RM45,000
Estimated life 10 years
Current realizable value RM15,000
Estimated realizable value in one year's time
after use on the order RM12,000

(6) General overheads are to be allocated on the basis of 100 per cent of labour cost.


(a)Prepare a cost estimate to show clearly to management whether the company should supply the sub¬component or not. Give reasons for each resource valuation in your cost estimate.
(b) The management accountant reminded you to take into consideration all possible qualitative factors that might affect the decision made in part (a).
i.What are qualitative factors?
ii. Explain briefly THREE qualitative factors which you think must be brought to the
attention of management in respect of the above decision.

Best regards;



VIP Member
Feb 12, 2012
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Dear everyone,
Best regards;
1. Relevant Costs - those costs which will vary or can be avoided once the decision
has made.

2. Opportunity costs is also known as relevant costs. The best benefits obtained for using
an assets in other alternatives (e.g. selling them) is the costs of using such assets
in the new project.

3. Sink Costs or past costs (e.g. the purchase costs for the old assets) is irrelevant costs
as such costs has already been paid.

4. Disposal value or net realisable value of an old asset is treated as opportunity costs
(i.e. relevants costs) if they can be used in the new project.

5. Gain on disposal of old assets is ignored in "Relevant Costs Apporach"

6. The depreciaton of the new asset is the relevant costs when it is used to periodically
write off the costs of the new assets

Think about the above points and do the question again
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