There might be occasions when a variable cost is in fact a sunk cost (and therefore a non-relevant variable cost). For example, suppose that a company has some units of raw material in stock. They have been paid for already, and originally cost $2000. They are now obsolete and are no longer used in regular prouction, and they have no scrap value. However, they could be used in a special job which the company is trying to decide whether to undertake. The special job is a 'one-off' cusotmer order, and would use up all these materials in stock.
(a) In deciding whether the job should be undertaken, the relevant cost of the materials to the special job is nil. Their original cost of $2000 is a sunk cost, and should be ignored in the decision.
(b) However, if the materials did have a scrap value of, say, $300, then their relevant cost to the job would be the opportunity cost of being unable to sell them for scrap, ie $300.
- Paper4 Accounting for Costs, Part D: Decision Making, Pg262.
dun ask me why but i just felt like posting this to show the agony that i survive in.
i dunno why i posted this.
