Skip to content

CA Intermediate · Cost and Management Accounting · Introduction to Cost and Management Accounting

Mehta Engineering owns a machine bought years ago for Rs 6,00,000 (book value Rs 2,00,000). If not used, it can be rented out for Rs 45,000 a year. The firm uses it for an internal job and pays Rs 30,000 for power and labour for that job. For deciding whether to take the job, what is the relevant cost of the job?

The relevant cost is Rs 75,000, being the Rs 30,000 of power and labour that will actually be spent plus Rs 45,000 of rent forgone as opportunity cost. The machine's purchase price and book value are sunk costs and must be ignored in the decision.

  1. ARs 75,000Correct
  2. BRs 2,30,000
  3. CRs 30,000
  4. DRs 6,30,000

Explanation

Relevant cost = out-of-pocket cost Rs 30,000 + opportunity cost of forgone rent Rs 45,000 = Rs 75,000. Rs 30,000 alone ignores the forgone rent. The purchase price and book value are sunk and irrelevant, so the Rs 2,30,000 and Rs 6,30,000 options wrongly include them.

Did you get it right without looking?

One question tells you little. A timed set on Introduction to Cost and Management Accounting shows your real accuracy, how long you take and where you lose marks.

Practise Introduction to Cost and Management AccountingFree diagnostic mock

More Introduction to Cost and Management Accounting questions