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

Rajesh Foods Pvt. Ltd. is considering outsourcing packing. Internal cost per unit is ₹18, made up of ₹11 variable and ₹7 allocated fixed overhead, of which only ₹3 would be avoided if the work is outsourced. The vendor quotes ₹15 per unit. For decision purposes, what is the relevant internal cost per unit and the effect of accepting the quote?

The relevant internal cost is ₹14 per unit, being variable cost ₹11 plus avoidable fixed cost ₹3. Since the vendor charges ₹15, outsourcing increases cost by ₹1 per unit. Unavoidable allocated overhead is irrelevant to the decision.

  1. A₹14 relevant cost; accepting increases cost by ₹1 per unitCorrect
  2. B₹18 relevant cost; accepting saves ₹3 per unit
  3. C₹11 relevant cost; accepting increases cost by ₹4 per unit
  4. D₹18 relevant cost; accepting increases cost by ₹3 per unit

Explanation

Relevant cost is the cost that would be avoided: variable ₹11 + avoidable fixed ₹3 = ₹14. Vendor price ₹15 exceeds ₹14, so accepting raises cost by ₹1 per unit. Using full cost of ₹18 wrongly includes unavoidable fixed overhead of ₹4 and suggests a saving of ₹3.

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