Question

ABC is considering a special order for 20 gold bracelets for a wedding party. The usual selling price is $190 and the estimated unit cost is $149 ($86 in direct materials, $45 in direct labor, and $25 in overhead). The overhead is fixed except $4 per unit. Custom engraving for this order will add $2 in materials per bracelet and require rental of a specific machine for $200 (no other use). There would be no effect on other sales or customers.

What is the total relevant cost for this special order?

Answer 1

Relevant costs are those costs which results in cash outflow or inflow and has a bearing on the decision to be made. The company in question has a special order for manufacturing 20 gold bracelets. So any costs which results in cash outflow due to accetping of this order alone are relevant cost. Apportioned or allocated costs or fixed costs are not relevant costs for decsion making.

The following table shows calculation of relevant costs for this special order:

Particulars	Amount
Direct Material cost ($86*20)	$1,720
Direct Labour cost ($45*20)	$900
Variable overhead cost ($4*20)	$80
Custom engraving cost ($2*20)	$40
Rental of specific machine with no other use	$200
Total Relevant cost (sum of above)	$2,940

Thus the total relevant cost for this special order is $2,940.

Out of the total overhead of $25 per unit only $4 is considered since rest all are fixed overhead. Fixed costs are irrelevant costs. Rental cost of specific machine becomes a relevant cost since it has no other use and will be incurred only if this order is accepted. Similarly engraving costs are also relevant.