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Dear Tutor,
I am wondering that:
+ equation of relevant cost of labour when labour in short supply and would be diverted form other work is :
rlv cost= cost of labour time + contribution forgon+ variable o/h
but in example in BPP page 155.
“Labour
The contract requires 800 hours of skilled labour. Skilled labour is paid $9.50 per hour. There is a shortage of skilled labour and all the available skilled labour is fully employed in the company in the manufacture of product P. The following information relates to product P:
Selling price =100,
Less: Skilled labour hour= 38+ other variable o/h = 22
—> contribution per unit = 40
—>relevant cost = cost of skill labour+ opportunity cost
Cost of skilled labour = 800*9.5= 7,600
opportunity cost = 800*40/(38/9.5)= 8,000
—> relevant cost of labour = 15,600Why variable o/h = $22/ unit do not be mentioned in consideration???
in example page 164
For example, suppose that a special job would require 50 hours of labour time. Employees are paid $10
per hour. There is sufficient idle capacity among the work force for 40 hours of the work. The extra ten
hours would be worked in overtime, for which the additional pay is $12.50 per hour.
In this example, the relevant cost of labour is the incremental cost. Of the 50 hours required for the work,40 hours would be paid anyway, so the cost is a committed cost that will be incurred anyway, and it is not relevant. However there will be additional costs of $125 (10 hours at $12.50 per hour) for the overtime working, which will be an additional ‘cash’ cost.
Suppose that another special job will require 20 hours of skilled labour. The skilled work force is paid $15 per hour and is working at full capacity. If the special job is undertaken, the skilled labour would be taken off other work that earns a contribution of $12 per hour, after deducting the costs of the labour and variable overheads of $1.5 per hour. In this situation the relevant cost of labour must include the variable cost of the labour plus any associated variable overhead, and the contribution that would be lost by taking the skilled workers off the other work
relevant cost = labour cost ( 20*15)+ variable o/h( 20*1.5)+ contribution forgone( 20*12) = 570.Hope that you can help me to solve this stuff?
Regards,When labour is moved from another job, then the relevant cost is the cost of the labour time plus the lost contribution. Variable overheads are only relevant if there are extra overheads being incurred in doing the other work. Usually, any extra overheads are listed separately in the question, but they are relevant in the second of your questions only because they are being incurred on a labour hour basis.
I do suggest that you watch the free lecture on relevant costing.
If in 1st question its was given that variable overheads are $22 per labour hour .Will u use it in calculating relevant cost?
Plz answer:
A company needs 5,000 hours of labour for a contract they have been asked to quote for. The work currently being carried out by our employees is generating a contribution of $12 per hour, although there is currently a substantial amount of idle time. Our workers are paid at the rate of $8 per hour. What is the relevant cost of the labour required for the contract?
A NIL
B $40,000
C $60,000
D $100,000I notes chapter 9, mcq no 3 answer is B .shouldnt it be A
It should indeed be A.
Thank you for noticing the error – I will have it changed.
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