Question 4 20 Marks

A Hardware company is considering a new project to improve its manufacturing capacity. A new project requires the use of an existing machine that would otherwise be sold.

The managing Director (MD) of the Company is aware about the concept of relevant costing but he is not clear about the application of it in a particular situation.

The following information is available about the machine

Original purchase price = OMR 40,000

Net Book Value of Machine = OMR 10,000

Current sales value (estimated) = OMR 9,000

Required:

1. If company is using the above machine, what is the relevant cost and what is irrelevant cost of the information available about the machine. Explain all the costs clearly.

10 Marks

2. What do you understand by relevant cost? Explain the different Elements of Relevant Costing. 10 Marks