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

Required

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

Solution

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

 

X

X

Cash in flows

 

 

Scrap sales (250 kg x Shs. 1.00)           

 

250

 

Nil

250

Cash outflows

 

 

Contract Y purchases (600 kg x Shs. 3)

 1800  

-

Disposal cost (150 kg x Shs. .5)

 

  75

 

 1800

  75

Net cash inflow/outflow

(1800)

175

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:

 

Shs.     

Shs.

Benefits

 

    75

Disposal cost avoided

 

 

Less costs

 

 

Contract Y purchases 

1,800  

 

Scrap sales foregone

       250

2,050

Opportunity cost

 

1,975

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







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