Reference no: EM131130069

Relevant costs and cost behaviour

(a) Distinguish between 'opportunity cost' and 'out of pocket cost' giving a numerical example of each using your own to support your answer.

(b) Jason travels to work by train to his 5-day week job. Instead of buying daily tickets he finds it cheaper to buy a quarterly season ticket which costs £188 for 13 weeks.

Debbie, an acquaintance, who also makes the same journey, suggests that they both travel in Jason's car and offers to give him £120 each quarter towards his car expenses. Except for weekend travelling and using it for local college attendance near his home on three evenings each week to study for his CIMA Stage 2, the car remains in Jason's garage.

Jason estimates that using his car for work would involve him, each quarter, in the following expenses:

	(£)
Depreciation (proportion of annual)	200
Petrol and oil	128
Tyres and miscellaneous	52

You are required to state whether Jason should accept Debbie's offer and to draft a statement to show clearly the monetary effect of your conclusion.

(c) A company with a financial year 1 September to 31 August prepared a sales budget which resulted in the following cost structure:

	% of sales
Direct materials	32
Direct wages	18
Production overhead: variable	6
fixed	24
Administrative and
selling costs:	variable
fixed	7
Profit	10

After ten weeks, however, it became obvious that the sales budget, was too optimistic and it has now been estimated that because of a reduction in sales volume, for the full year, sales will total £2 560 000 which is only 80% of the previously budgeted .

You are required to present a statement for management showing the amended sales and cost structure in £s and percentages, in a marginal costing format.