A company can use material that it already owns, bought for £6 per kg, in a special order. It has no other use for it except selling it as scrap at £2 per kg. The replacement cost is £9 per kg. What is the relevant cost per kg of using the material?
Answer and explanation
Correct answer: A. £2
- Step 1: When material is already owned and not needed elsewhere, the relevant cost is the better of its resale value and the cost of reusing it.
- Step 2: Here the only alternative use is sale as scrap at £2 per kg, so using it loses £2.
- Step 3: Historic cost is sunk.
Answer
£2.
Why not the others: £6: This is the historic cost, which is a sunk cost and not relevant. £9: The replacement cost is relevant only if the material would be replaced; here it will not be. £4: This is the difference between the cost and the scrap value, which has no use in the decision.
Practise more Management information and cost classification.
Free questions with an explanation for every one, and full timed ACCA Applied Knowledge (BT, MA, FA) mock tests.
More Management information and cost classification questions
- Which of the following best describes the purpose of management accounting information?
- A company records the cost of a delivery vehicle's fuel that varies with distance travelled. How is this cost classified in terms of behavio…
- The monthly cost of supervising a production line is £8,000 for up to 10,000 units. If output exceeds 10,000 units, a second supervisor is n…
- A company is deciding whether to accept a special order. An earlier purchase of machinery for £50,000 is already paid for and cannot be sold…
- Which one of the following is an example of a direct cost of producing a wooden table?
- The following costs were incurred at two activity levels: 4,000 units cost £36,000 and 7,000 units cost £48,000. Using the high-low method…