Relevant Costs in Decision Making... Continued

However, from the economic or decision making perspective, the stipulated 20 years is arbitrary and may not reflect the actual economic condition.  In this case, we have to ask how much the equipment is worth at this time (market value). If the equipment, after 20 years, can be sold at 14,000, then that is its value. Therefore, if a decision has to be made with regard to disposing or transacting the equipment, the market value rather than the book record should be used.

Inventory Valuation
In a related scenario, participants may be given the following below for discussion and decision on inventory valuation.

Closely related to the previous activity in lesson 3, suppose labor cost for constructing a fence was 60,000 and you already had acquired supplies (wires, nails, posts etc) at 50,000. If the fencing supplies price declined to 37,500 (replacement cost), and a fencing contract is offered to you at 100,000, would you take the contract?

Typical accounting allocates costs based on acquisition. The challenge we face is whether to use acquisition cost or replacement cost.  The table below presents the analysis of the two alternatives.