Q2
a) Identify and list the relevant and irrelevant cos

Question

Q2
a) Identify and list the relevant and irrelevant costs.
b) Identify and list the recurring and non-recurring benefits and costs.

PREETHIMOL GOPI · Accepted Answer

Answer 2

Relevant Costs: These are the costs which will be affected when the company takes the decision to close the Rockford plant.

List of Relevant Costs:

Direct Material Cost – These expenses will be null if plant is closed

Direct Labor Cost – These expenses will be null if plant is closed

Indirect Labor Cost – These expenses will be null if plant is closed

Advertising Expense- Direct Cost – These expenses will be null if plant is closed

Pension Expense – These expenses will be reduced to half if plant is closed

Equipment and vehicles maintenance expense – These expenses will be null if plant is closed

Rent income from sublease of building B to Coca-Cola for storage of its products

Irrelevant Costs: These are the costs which will not change and are independent of whether the plant is closed or not closed.

List of Irrelevant Costs:

Administrative Expenses – These expenses will still be incurred irrespective of whether the plant is closed or not

Salary of the plant manager and his staff – These expenses are allocated expense and will be incurred by the company irrespective of whether the company takes decision to close the plant or not

Depreciation expenses on equipment and vehicle is not real expense  (this is not real cash outflow)

Rent expenses of building A and building B will be incurred for two years after the closure of plant and therefore these are considered as irrelevant costs.

List of recurring and non-recurring benefits and costs

Recurring benefits and costs:

Costs saved will be recurring benefit for the company as the company will save these costs every year. These costs are like Direct expenses, advertising expenses, pension expenses, rent expenses after two years, etc.

Rent income from Coca-Cola will be recurring benefit for the company as this will be earned every year if plant is closed and the premises is given on sub-lease.

Non-recurring benefits and costs:

Company will incur charges to terminate the contract with its supplier which will be one time expense for the company if it decides close the plant.

Income from sell of scrap will also be one time income for the company from the sell of scrap of equipment and vehicle if it closes the plant and so its non-recurring benefit.

Q2

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