CMA Final · Strategic Cost Management · Decisions involving Alternative Choices
Arjun Engineering has a special order for 1,000 units needing 4 kg of material M each. It holds 3,000 kg of M bought earlier at Rs 50/kg. M is regularly used in other products, and its current replacement price is Rs 65/kg. Which is the relevant material cost of the order?
The relevant material cost is Rs 2,60,000. Since material M is in regular use, using it for the order means replacing it, so the current replacement price of Rs 65 applies to 4,000 kg, not the historical Rs 50 cost.
- ARs 1,50,000
- BRs 2,00,000
- CRs 2,60,000Correct
- DRs 2,10,000
Explanation
Material is in regular use, so its relevant cost is replacement cost. 1,000 x 4 kg = 4,000 kg x Rs 65 = Rs 2,60,000. Using the historical price gives Rs 2,00,000, which is wrong because the stock would have to be replaced.
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