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ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting

Brightwater Engineering is deciding whether to accept a one-off order using spare capacity. Management debates the following costs: (1) $60,000 already spent on a specialised tool that has no other use, (2) skilled labour that is on a guaranteed $50,000 weekly wage and is currently idle, (3) a raw material in stock bought for $20,000 that would cost $27,000 to replace and has no alternative use except to be sold for $9,000 scrap, and (4) a new licence fee of $5,000 payable only if the order is accepted. Which total is the relevant cost of the order from these items?

The relevant cost is $14,000. The tool cost is sunk and the idle guaranteed wages are paid regardless. The material's opportunity cost is its $9,000 scrap value, and the $5,000 licence fee is incremental, giving $14,000.

  1. A$14,000Correct
  2. B$25,000
  3. C$32,000
  4. D$84,000

Explanation

The tool is a sunk cost. Idle guaranteed labour is paid either way, so it is irrelevant. The material has no alternative use except scrap, so its opportunity cost is the $9,000 scrap value, not cost or replacement cost. The licence fee of $5,000 is incremental. Total = 9,000 + 5,000 = $14,000. Using replacement cost gives the $32,000 distractor.

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