CIMA - C01 Fundamentals of Management Accounting: Study Text by BPP Learning Media

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Sample text

It is expected that the machine will generate future revenues of $10,000. Alternatively, the machine could be scrapped for $8,000. An equivalent machine in the same condition would cost $9,000 to buy now. What is the deprival value of the machine? Solution Firstly, let us think about the relevance of the costs given to us in the question. Cost of machine = $14,000 = past/sunk cost Future revenues = $10,000 = revenue expected to be generated Net realisable value = $8,000 = scrap proceeds Replacement cost = $9,000 When calculating the deprival value of an asset, use the following diagram.

Cost to the unit, job or process. There are two particular circumstances in which the overtime premium might be a direct cost. 14 (i) If overtime is worked at the specific request of a customer to get his order completed, the overtime premium paid is a direct cost of the order. (ii) If overtime is worked regularly by a production department in the normal course of operations, the overtime premium paid to direct workers could be incorporated into the (average) direct labour hourly rate. (d) Bonus payments are generally an indirect cost.

A cost which is not controllable by a manager in one department may be controllable by a manager in another department. For example, an increase in material costs may be caused by buying at higher prices than expected (controllable by the purchasing department) or by excessive wastage (controllable by the production department) or by a faulty machine producing rejects (controllable by the maintenance department). Some costs are non-controllable, such as increases in expenditure items due to inflation.

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