Page 4 - CIMA May 18 - MCS Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

extra cost unless the bus runs for a different amount of kilometres, but the revenue from the
route no longer being run will be lost and so should be taken into account.

Allocated costs / overheads

Only overhead costs that will genuinely be incurred in addition to existing ones should be
included. For instance, if the new route is to be run from an existing depot, some of the overhead
costs will not change. But if an extra staff member was taken on to oversee the new route then
their payroll costs would need to be included. Any change in overhead cost allocation that are
simply charged on from head office but that will not change in total from taking on the new route
should not be taken into account.

Profit figures

Under relevant costing any required profit element should be excluded from the calculations. The
aim is to give a figure that represents the genuine cash outflow that will be incurred by the
company from taking on the new route and profit mark ups are not cash items.

Benefits of using relevant cash flows

The total relevant cost of taking on the project will represent the cash outflow the business will
make from taking on the route. This means that if the company desires it can set a tender fee
that just covers these costs and in doing so should be able to set a very competitive fee and
potentially win more tenders.

Limitations of using relevant costs

Whilst the use of relevant costs to calculate fees for individual tenders can be very useful, it would
not be appropriate to use it for all decisions. Because only the incremental costs of taking on a
new route are considered, pricing on this basis would not lead to increases in profits for the
business.

Financial Manager

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