P1 - CHAPTER 10 - KNOWLEDGE CHECK - Relevant Costs and Decision Making - IMAS

21:51, 15/05/2022 P1: CHAPTER 10 – KNOWLEDGE CHECK: Relevant costs and decision making - IMAS
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P1: CHAPTER 10 – KNOWLEDGE CHECK: RELEVANT

COSTS AND DECISION MAKING
by nkosinathit | Jan 21, 2021
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1 of 20 Questions answered correctly
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Pattersons Ltd is an organisation that manufactures bread. A customer

has recently placed an order for rye bread.
This order will require 4,000kgs of rye flour, a regularly used ingredient in
Pattersons. The company has 2,000kgs of this flour in its inventory and
this rye flour was purchased at £2.20 per kg. Due to adverse weather
conditions, the current replacement cost of rye flour is now £2.90 per kg.
If Pattersons Ltd did not proceed with this order, the firm could sell its
inventory of rye flour on the open market and take advantage of the price
increase in this commodity. The sales director reckons that the firm could
get a price of £2.75 per kg for the flour.
What is the relevant cost of this customer order?
£ _______ (Do not use commas when inserting your answer and round
your answer to the nearest whole number)
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45346 (11600)
Incorrect
FEEDBACK
The correct answer is: "£11,600"
The rye flour is a
regularly used ingredient in Pattersons and as a result, it will need to
be replaced if this order is to be accepted. This means that the only
relevant cost of using the rye flour is the replacement cost of the full
4,000kg that will be used in production:
4,000kg * £2.90
(replacement cost) = £11,600
40 hours of skilled labour are needed for a special contract. Skilled labour
is scarce and would have to be taken off production of a different product
in order to work on the special contract. The details of the other product
are shown below:
Sales Price 120
Direct materials (@ $3/kg) 18
Skilled labour (@ $40/hr) 20
Variable overheads (@$4/hr) 2
Fixed overheads 20
The skilled workers’ pay rate would not change, regardless of which
product they worked on.
What cost for skilled labour should be included when pricing up the
special contract? $____
466 (8000.00,8000)
Incorrect
FEEDBACK:
AVAILABLE ANSWERS
8000.00 (1 Mark)
Existing product earns a contribution per hour of ($120 - $18 - $20 -
$2) / 0.5 hours
= $160
Relevant cost = Contribution forgone PLUS
direct labour cost
= $160 + $40 = $200 per hour
Total cost = $200 x
40 hours = £8,000
Skilled labour is currently employed by your company and paid at a rate of

$18.00 per hour. If a new job were undertaken it would be necessary
either to work 35 hours’ overtime, which would be paid at time plus one
half, OR in order to carry out the work in normal time, reduce production
of another product that earns contribution of $24.00 per hour.
What is the relevant cost?
$ _______
4635 (945)
Incorrect
FEEDBACK
The answer is $945.
Skilled labour can either be
obtained by asking staff to do overtime or by stopping production of
another product, because there is no skilled labour available.
Cost of
overtime = 35 hrs x $18 p/h x 1.5 = $945.
Stop existing production =
labour costs + lost contribution = (35hrs x $18 p/h) + (35hrs x $24
p/h) = $1,470.
Choose the cheapest option which would be paying
staff overtime, therefore $945.
A company is considering a short term pricing decision to utilise some

spare capacity. The item to be manufactured and sold would use 1,500
kgs of raw material Q.
Material Q is in regular use by the company. It currently has 1,000 kgs in

inventory, which was purchased last month at a cost of $4 per kg. The
current replacement cost of material Q is $4.80 per kg and the current
inventory could be sold for $4.30 per kg.
Calculate the relevant cost of material Q for the purposes of this

decision.
$6,400
$6,450
$6,700
$7,200
Incorrect
FEEDBACK:
AVAILABLE ANSWERS
$7,200 (1 Mark)
The material is in regular use, so even if some is already in inventory
it will need to be replaced at the current purchase price. Any not in
inventory will also have to be purchased, so the relevant cost for all
the material is the replacement cost.
Replacement cost for Q =
1,500 kgs × $4.80 = $7,200
General overheads of $5,000 are based upon the overhead absorption

rate of $7.50 per unit as set in the budget. The only general overhead cost
that can be specifically identified with the job is the time that has been
spent in considering the costs of the job and preparing the quotation. This
amounted to $250.
What is the relevant cost?
$5,000
$0
$7.50 per unit
$250
Incorrect
FEEDBACK
The answer is $0.
The other costs should be ignored as
they are not relevant to the quote.
I Love Oranges (ILO) makes 3 products, budgeted information is below.
Grapefruit Lemon Lime
$ $ $
Selling Price 50 68 94
Material A 20 30 40
Material B 5 8 10
Labour 10 5 15
Demand (units) 1000 2000 3000
Material A is in short supply & ILO only have 10,000kg available.
Material A costs $10/kg.
What is the optimum production plan for ILO?
1000 Grapefruits, 0 Lemons & 2975 Limes.
Incorrect
FEEDBACK:
AVAILABLE ANSWERS
1000 Grapefruits, 2000 Lemons & 500 Limes. (1 Mark)
Grapefruit Lemon Lime
Contribution/unit 15 25 29
Material A/unit (kgs) 2 3 4

Contribution/kg 7.5 8.33 7.25
nd st rd
Rank 2 1 3

Production Plan
Product Units kg/units kg used kg left
10,000
Lemon 2000 3 6000 4,000
Grapefruit 1000 2 2000 2,000
Lime 500 4 2000 -
K Ltd is preparing a quotation for a two-month consultancy project.

Currently the company employs a consultant on an annual salary of
€60,000. This consultant is fully employed on current projects and, if he
were to be transferred to this new project, then an existing junior
consultant would be used to cover his current work. The junior consultant
would be paid a bonus of €8,500 for undertaking this additional
responsibility.
Alternatively the company could hire an external consultant on a two

month contract at a cost of €7,000.
The relevant cost to be used in preparing the quotation is:
€60,000
€8,000
€7,000
€8,500
Incorrect
FEEDBACK
The answer is €7,000.
It is cheaper to hire the external
consultant for €7,000 rather than pay the €8,500 bonus to the
existing junior consultant. The consultant's salary is not a relevant
cost as the consultant will still be paid even if the project does not
proceed.
A company manufactures two components (L and M) which are

incorporated into different products. All the components are
manufactured using the same general purpose machinery. The following
production cost and machine hour data are available, together with the
purchase prices from an outside supplier.
L M
Production cost: $ $
Direct material 12 18
Direct labour 25 15
Variable overhead 8 7
Fixed overhead 10 6
____ ____
Total 55 46
Purchase price from outside supplier $57 $55
Machine hours per unit 3 5
Manufacturing requirements show a need for 1,500 units of each

component per week. The maximum number of general purpose
machinery hours available per week is 8,250.
The company wishes to minimise costs. In order to obtain the full

amount of components, what will need to be purchased from the
outside supplier?
667 L
1250 L
667 M
750 M
Incorrect
FEEDBACK:
AVAILABLE ANSWERS
750 M (1 Mark)
Make or buy with limiting factor.
Both components are cheaper to
make than to buy but as there isn’t the production capacity to make
all 3,000 units needed, some must be purchased from the outside
supplier. Use the saving per unit of limiting factor to rank the
products and work out which ones to manufacture to obtain the
biggest saving. Purchase any that can’t be manufactured.
Component L M
Incremental production cost $45 $40
Purchase price $57 $55
Saving from making $12 $15
Machine hours per unit 3 5
Saving per machine hour $4 $3
Rank 1st 2nd
S Co. is calculating the relevant cost of the material to be used on a

particular contract. The contract requires 2,400 kgs of material A and this
can be bought for $5.20 per kg. S Co. bought 8,000 kgs of material A some
time ago when it paid $4.10 per kg. Currently 2,100 kgs of this remains in
stock.
The stock of material A could be sold for $3.80 per kg. S Co. has no other
use for material A other than on this contract, but it could modify it at a
cost of $4.10 per kg and use it as a substitute for material B. Material B is
regularly used by the company and can be bought for $6.80 per kg.
The relevant cost of the material for the contract is:
$3,320
$7,230
$12,050
$4,350
Incorrect
FEEDBACK
The answer is $7,230.
2,100 kg x *$2.70 + 300 kg x
$5.20 = $7,230.
*The key to answering the question is valuing the
2,100kg of material A S Co. currently holds in stock. By spending
$4.10 on it, S Co. could turn the material into something worth
$6.80. If something will be worth $6.80 when S Co. spends $4.10 on
it, then it is at present worth $2.70. This is the value to S Co. of the
stock.
E Limited manufactures four products from different quantities of the

same material which is in short supply. The following budgeted data
relates to the products:
Product Product Product Product
E1 E2 E3 E4
$/unit $/unit $/unit $/unit
Selling price 90 112 123 103
Materials ($6 per kg) 24 33 41 30
Conversion costs 40 65 65 55
Cost total 64 98 106 85
____ ____ ____ ____
Profit 26 14 17 18
____ ____ ____ ____
Machine time per unit

0.5 0.5 0.6 0.6
in hours
The conversion costs include general fixed costs that have been absorbed
using a rate of $30 per machine hour.
The ranking for the most profitable use of the raw materials is to make
product:
1st E1, 2nd E4, 3rd E2, 4th E3
Incorrect
FEEDBACK:
AVAILABLE ANSWERS
1st E1, 2nd E4, 3rd E2, 4th E3 (1 Mark)
Product cost per unit E1 E2 E3 E4

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$ $ $ $
Conversion costs 40 65 65 55
Less general fixed costs 0.5 × 0.5 × 0.6 × 0.6 ×

absorbed $30 $30 $30 $30
15 15 18 18
____ ____ ____ ____
Variable conversion cost 25 50 47 37
Material cost 24 33 41 30
____ ____ ____ ____
Total variable cost 49 83 88 67
Selling price 90 112 123 103
____ ____ ____ ____
Contribution 41 29 35 36
____ ____ ____ ____
Kgs per unit at $6 per kg 4 5.5 6.83 5
Contribution per kg $10.25 $5.27 $5.12 $7.20
Ranking 1st 3rd 4th 2nd
Milner Inc has been asked to carry out a systems amendment for Klopp
Co. The amendment will require 200 programmer hours, and Milner Inc
has only one programmer who is capable of doing the job.
The programmer is paid €50 per hour. Employers’ NIC and pension
contributions are 15% of salary. Other overheads are absorbed by adding
150% to direct salaries.
The programmer is scheduled to start work on a project for another

customer, Dalglish Co, the revenue from which is €80,000 and non-salary
direct costs are €2,000. This job will also take 200 hours. If the
programmer is assigned to the Klopp Co job, Milner Inc will have to hire
another programmer to carry out the Dalglish Co job at a cost of €30,000.
The relevant cost of the programmer’s time if Milner Inc carries out the
systems amendment for Klopp Co is €30,000.
True or False?
True
False
Correct
FEEDBACK
The answer is: "True"
The hire of a programmer is the
incremental cost that would be incurred if the programmer works
on the Klopp Co job. It is therefore €30,000.
From the options below, select the THREE categories of relevant costs.
Sunk costs
Differential costs
Committed costs
Incremental costs
Absorbed fixed costs
Opportunity costs
Incorrect
FEEDBACK
The answer is "Incremental costs", "Differential costs"
and "Opportunity costs"
Further
Selling price Selling price
variable
Product after common after further
processing
process processing
cost
$/litre $/litre $/litre
M 6.25 8.40 1.75
N 5.20 6.45 0.95
P 6.80 7.45 0.85
Calculate which of the above products are worth processing further.
Incorrect
FEEDBACK
The answer is: M & N.
To work out the optimal
processing plan we need to also consider the extra benefit
compared to the extra cost involved in processing M, N and P
further.
Products Extra revenue Extra cost Net benefit
M $8.40 - $6.25 = $2.15 $1.75 $0.40
N $6.45 - $5.20 = $1.25 $0.95 $0.30
P $7.45 - $6.80 = $0.65 $0.85 ($0.20)
The optimal processing plan is to make products M and N further as

they yield further profits, but not product P as it yields a further loss.
In order to utilise some spare capacity, E Plc. is preparing a quotation for a

special order which requires 10,000 kgs of material A. E Plc has 4,000kgs
of material A in stock (original cost $2.50 per kg). Material A is used in the
company’s main product, X.
Each unit of X uses 5kgs of material A and, based on an input value of

$2.50 per kg of A, each unit of X yields a contribution of $12.00. The
resale value of material A is $3.50 per kg. The present replacement price
of material A is $3.00 per kg. Material A is readily available in the market.
The relevant cost of the 10,000kgs of material A to be included in the

quotation is:
$ _________ (input answer without commas).
546 (30000)
Incorrect
FEEDBACK
The answer is $30,000.
The relevant cost of the
10,000kgs of material A to be included in the quotation is $30,000.
Since material A is in regular use and is readily available in the
market, its relevant cost is the replacement price of $3/kg. So
10,000 kgs × $3/kg = $30,000.
 Waxmaster Ltd is a manufacturer of candles, the firm operates

with 400-500 hours per period of excess labour capacity. This excess
capacity in labour can undertake any additional work that is provided
to them.
The firm has recently received a customer order for a special type of
candle that requires 5,000kgs of beeswax. The order is to be completed
this period.
The procurement director reckons that the current cost of beeswax is

£4.50 per kg in the open market. Waxmaster does not currently use this
ingredient regularly but they do have 500kg of this ingredient in
inventory as a result of an erroneous order that was made a year ago. The
price for that order was at £4.30 per kg. This inventory could be sold for
£2,000 in its current state.
If the order is to go ahead, the firm will require 300 labour hours in the
period to produce these candles. The current wage rate in Waxmaster is
£9 per hour.
This specific order is machine intensive and will drive the fixed cost of
electricity from £10,000 a period to £13,500. Electricity costs will go
back to £10,000 a period once the order is finished.
What is the total relevant cost of this customer order?
£ ________ (Do not use commas when inserting your answer and round
your answer to the nearest whole number)
65465 (25750)
Incorrect
FEEDBACK
The correct answer is: "£25,750"
5,000kgs are
required, 500kg is already in inventory and 4,500kg must be
purchased:
500kg in inventory: Opportunity cost = £2,000 or £4 per
kg
4,500kg to be purchased: 4,500kg x £4.50 = £20,250
Raw
material cost: £20,250 + £2,000 = £22,250
Labour cost is nil as the
firm has excess capacity for the period. This job will require 300
labour hours but the question mentions that the company has
excess labour capacity of 400-500 hours per period, which means
there is no incremental labour cost involved in accepting this job.
The increase in the cost of electricity of £3,500 is a relevant cost as
it will be incurred as a direct result of this order. It doesn’t matter
that electricity is deemed a fixed cost, if the cost has risen as a result
of the order and it is a cash outflow, then it is a relevant cost.
Total
cost = £22,250 + £3,500 = £25,750
Which of the following are assumptions that are made in relevant

costing?
Select all that apply:
Information about a decision is complete and reliable
The main objective of the decision is to maximise

profit/contribution
Firms do not hold inventory (i.e. whatever is produced, is sold)

Cost behaviours are known with certainty
Fixed costs are always non-relevant costs and variable costs

are always relevant costs
Incorrect
FEEDBACK
The correct answers are:
1. Cost behaviours are known
with certainty
2. The main objective of the decision is to maximise
profit/contribution
3. Information about a decision is complete and
reliable

The main assumptions of relevant costing are:
Cost behaviours are known with certainty (i.e. fixed costs and
variable costs can be split in a way that is accurate and fair)
Costs, prices and volumes are known with certainty
Information concerning a decision is complete and reliable
The objective of the decision is to maximise profit or
contribution
It is not true that all fixed costs are non-relevant and so this is not an
assumption of relevant costing. It is also not true that one of the
assumptions of relevant costing is that firms hold no inventory.
Existing inventory can play a major role when trying to calculate the
relevant cost of materials for example.
A project is being proposed at a board meeting and several suggested

costs in relation to the project have been brought up
From the suggestions below, identify the TWO which are relevant costs:
The future salary of a market researcher who will carry out

the development of a new product. The position of the market
researcher would be created especially for the new product
development program. However, the $15,000 salary would be a
fixed cost
An additional monthly cost of $3,000 that would be

considered as a running cost of a new machine to be purchased
for manufacturing a well-established product. The new machine
will reduce the fixed overhead absorbed by the product by $150

as it will save on labour time.
The future cost of cleaning the office space, which will amount
to $150. Contractors can clean the office and the company has
the right to cancel the contract by giving one month’s notice.
A $300 expense that will be paid to the marketing manager as

a reimbursement payment. The company has decided to pay this
amount to the marketing manager as he flew out to Naples, Italy
to negotiate a significant contract for the company.
Incorrect
FEEDBACK
The answers are:
An additional monthly cost of $3,000 that would be considered
as a running cost of a new machine to be purchased for
manufacturing a well-established product. The new machine
will reduce the fixed overhead absorbed by the product by $150
as it will save on labour time.
The future salary of a market researcher who will carry out the
development of a new product. The position of the market
researcher would be created especially for the new product
development program. However, the $15,000 salary would be a
fixed cost.
The cost of cleaning the office space is not correct because even if
the contract is cancelled today, it will be incurred.
The $300 expense
that will be paid to the marketing manager as a reimbursement is
incorrect because this cost is a sunk cost and it cannot be recovered
even if the company does not go ahead with the negotiations.
From the options below, select the correct sequence of steps in

the decision making process.
Identify objectives, identify course of action, evaluate course

of action, select best option, compare actual v budget
Identify course of action, evaluate course of action, identify

objectives, select best option, compare actual v budget
Identify course of action, identify objectives, evaluate course

of action, select best option, compare actual v budget
Compare actual v budget, identify course of action, evaluate

course of action, identify objectives, select best option
Incorrect
FEEDBACK
The answer is "Identify objectives, identify course of
action, evaluate course of action, select best option, compare actual
v budget"
X Plc manufactures two types of baby car seats, normal and deluxe.
The selling price of a normal car seat is $100 per unit. It has a variable
cost per unit of $60. The selling price of a deluxe car seat is $150 per unit
and it has a variable cost per unit of $80.
The plant capacity of producing the Deluxe seats is 150,000 units.

Assuming that the maximum market demand for normal car seats is
80,000 units and there is no such limitation for deluxe car seats, what
would be the ideal sales mix of the normal and deluxe car seats?
0 units of the normal car seat; 150,000 units of the deluxe car
seat
75,000 units of the normal car seat; 75,000 units of the deluxe
car seat
100,000 units of the normal car seat; 50,000 units of the

deluxe car seat
50,000 units of the normal car seat; 100,000 units of the

deluxe car seat
Incorrect
FEEDBACK
The answer is "0 units of the normal car seat; 150,000
units of the deluxe car seat".
The deluxe car seat has a greater
contribution margin per unit ($150 - $80 = $70) than the normal car
seat ($100 - $60 = $40). With no market limitation on the deluxe car
seat, the ideal sales mix would be to produce 150,000 units of the
deluxe car seat.
Jansen Ltd has three options for machine X. One of these options involves
modifying the machine now at a cost of £6,000, which will mean that the
company does not have to hire an alternative machine at a cost of
£17,200. This modification would mean that machine X would have to
be disposed of in one year’s time at a cost of £3,200.
Ignoring the time value of money, calculate the relevant cost of this

option.
£14,400
£9,200
£8,000
£6,000
Incorrect
FEEDBACK
The answer is £8,000.
Modification = £6,000, hire costs
avoided = £(17,200) and disposal costs = £3,200 and so the relevant
cost is a saving of £8,000.

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21:51, 15/05/2022 P1: CHAPTER 10 – KNOWLEDGE CHECK: Relevant costs and decision making - IMAS

P1: CHAPTER 10 – KNOWLEDGE CHECK: RELEVANT

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Restart Quiz View Questions

Pattersons Ltd is an organisation that manufactures bread. A customer

What is the relevant cost of this customer order?

Sales Price 120

Direct materials (@ $3/kg) 18

Skilled labour (@ $40/hr) 20

Variable overheads (@$4/hr) 2

Skilled labour is currently employed by your company and paid at a rate of

What is the relevant cost?

A company is considering a short term pricing decision to utilise some

Material Q is in regular use by the company. It currently has 1,000 kgs in

Calculate the relevant cost of material Q for the purposes of this

General overheads of $5,000 are based upon the overhead absorption

What is the relevant cost?

$7.50 per unit

I Love Oranges (ILO) makes 3 products, budgeted information is below.

Grapefruit Lemon Lime

Demand (units) 1000 2000 3000

Material A is in short supply & ILO only have 10,000kg available.

Material A costs $10/kg.

What is the optimum production plan for ILO?

1000 Grapefruits, 0 Lemons & 2975 Limes.

0 Grapefruits, 2000 Lemons & 3000 Limes.

1000 Grapefruits, 2000 Lemons & 500 Limes.

1000 Grapefruits, 2000 Lemons & 3000 Limes.

Grapefruit Lemon Lime

Material A/unit (kgs) 2 3 4

Contribution/kg 7.5 8.33 7.25

Product Units kg/units kg used kg left

Lemon 2000 3 6000 4,000

Grapefruit 1000 2 2000 2,000

Lime 500 4 2000 -

K Ltd is preparing a quotation for a two-month consultancy project.

Alternatively the company could hire an external consultant on a two

The relevant cost to be used in preparing the quotation is:

A company manufactures two components (L and M) which are

Purchase price from outside supplier $57 $55

Machine hours per unit 3 5

Manufacturing requirements show a need for 1,500 units of each

The company wishes to minimise costs. In order to obtain the full

Incremental production cost $45 $40

Purchase price $57 $55

Saving from making $12 $15

Machine hours per unit 3 5

Saving per machine hour $4 $3

Rank 1st 2nd

S Co. is calculating the relevant cost of the material to be used on a

The relevant cost of the material for the contract is:

E Limited manufactures four products from different quantities of the

Product Product Product Product

$/unit $/unit $/unit $/unit

Selling price 90 112 123 103

Materials ($6 per kg) 24 33 41 30

Cost total 64 98 106 85