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can any one help me in this basic concept of relevant costin

sivaram (Asst Mgr-Taxation) (6918 Points)

26 September 2009

For Computation of Relevant Costs for Contract

Material A Requirement 100 Kgs

In stock is 50 Kg

Book Value Rs250

Replacement Cost is Rs7/Kg

Realisable Value Rs3/Kg

Materaial A is regularly used by the company and if used on this order has to be replaced for use in other orders

My question is while computing Relevant Cost for the Contract why we are taking 100 Kg *Rs7=700 Rs

Since 50 Kgs is already in stock which is sunk so for this order can we consider only 50 Kgs *7=350 for computing the relevant cost

I am very weak in concepts please let me know why rRs700 is taken in computation instead of Rs350 please give your views clearly so that ican master the same

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MOHIT MAHAJAN (LCS, ACA) (2050 Points)
Replied 26 September 2009

Dear Sivaram

Here I am giving in brief the concepts I have learnt from our teacher-

Relevant costing is done for acceptance of Offer/Contracts/Special ordered job.

Offer/Contracts/Special ordered jobs are always presumed to be in addition to regular activities or work of the company.

The funda is that the material which is in regular use of the company should never be utilized for any offer or addtional contract. If the company needs material for the offer it should purchase it from the market and it should not be withdrawn from the stock. Material which is regularly used by the company should also never be sold. In case if due to offer, excessive material is to be purchased than the balance should be transferred to the stock.

In query it is given that Material A is regularly used by the company, so you can't say that the material lying in stock is sunk. A regularly used material can't be treated as sunk material. So as per this principle you will have to buy entire material required for the contract from the market and you can't use material lying in stock.

The reason for not using stock material is that the company shuld not risk its regular activities for the sake of additional offer or contract.

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