Determine opportunity costs, Cost Accounting

Determine Opportunity Costs

A company has material B in stock that originally cost Shs. 5000 for the 1000 Kshs in stores. The material is missing over from an old purchase order. The company is still considering employing it on contract X. The alternative course of action to utilizing material on contract X is as:

a) 600 kg could be employed in contract Y instead of buying similar material at Shs. 3 per kg.

b) A further 250 kg could be sold like scrap at Shs. 1 per kg

c) The remainder will have to be disposed at a cost 50 pence per kg


Prepare a summary that shows the opportunity cost of utlizing material B on contract X


The information may be presented in more than one way. An approach that focuses on each individual cash flow for each alternative is useful where the decision making condition becomes more complex, since it adopts a detailed analysis, that is easy to follow. Alternatively, the net costs and benefits may be summarized for employ in the alternative option decision.

a) Showing all relevant cash flows

Accepted Contract

Reject the contract




Cash in flows



Scrap sales (250 kg x Shs. 1.00)           






Cash outflows



Contract Y purchases (600 kg x Shs. 3)



Disposal cost (150 kg x Shs. .5)






Net cash inflow/outflow



The opportunity cost net outflow if material B is essential on contract X is Shs. 1975 . Utilizing a net costs and benefits summary if material B is used on contract X:







Disposal cost avoided



Less costs



Contract Y purchases 



Scrap sales foregone



Opportunity cost



Posted Date: 2/7/2013 1:55:36 AM | Location : United States

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