CAF-5 · Chapter 18 · Question 4 of 20
(Relevant Costing & Inventory Valuation) A special contract requires 800 kg of Material Alpha. The company has 500 kg of Alpha in inventory, originally purchased for Rs. 40/kg. Alpha is used regularly in normal production. An additional 300 kg must be purchased. The current market replacement price is Rs. 55/kg. The inventory could be sold as scrap for Rs. 20/kg. What is the relevant cost of Material Alpha for this special contract?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Rs. 44,000
Explanation
Since Material Alpha is in regular use, any quantity taken from inventory must be replaced for normal production. Therefore, historical cost and scrap value are irrelevant. The entire 800 kg must be valued at the current replacement cost: 800 kg * Rs. 55 = Rs. 44,000.
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