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CMA Final · Strategic Cost Management · Relevant Cost Analysis

Pooja Foods needs 800 kg of Material X for a job. Stock is 500 kg bought at Rs 40 per kg; its current replacement cost is Rs 52 per kg and its resale value is Rs 35 per kg. Material X is regularly used in production. The remaining 300 kg must be purchased at Rs 52 per kg. What is the total relevant cost of Material X for the job?

The relevant cost is Rs 41,600. Since Material X is in regular use, any stock consumed must be replaced at the current price of Rs 52 per kg. So all 800 kg are costed at replacement cost: 800 x 52 = Rs 41,600; historical and resale values are not relevant.

  1. ARs 41,600Correct
  2. BRs 35,600
  3. CRs 37,100
  4. DRs 36,000

Explanation

Because the material is regularly used, using stock means it must be replaced, so the relevant cost is replacement cost for all 800 kg: 800 x 52 = Rs 41,600. Rs 35,600 would use historical Rs 40 for stock (500 x 40 + 300 x 52 = 35,600), which is wrong.

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