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In a manufacturing plant, the work force is operating at full capacity. The work force is paid a fixed rate of $12 per hour for a 35 hour week. This is a fixed weekly wage, although for the purpose of management accountin, direct labour costs are treated as a variable cost. A customer has asked for a special job to be done that would involve taking employees off regular work that earns a contribution of $15 per hour, after allowing for direct labour cost and variable overheads $2 per hour. The special order would take 10 hours labour time.
The company must decide whether to agree to the customer’s request for the work, and to set a price. What would be the relevant cost of labour for this job.A $ 150
B $ 170
C $ 270
D $ 290Sir John can you please solve and tell me why we will add contribution to the total relevant cost.
You must have an answer in the same book in which you found the question!
You should use this forum to help with whatever parts of the answer you do not understand – not simply expect full answers to be prepared for you.The relevant cost of labour (when it is taken from other work) is the cost of the labour plus the variable overheads (because they are on an hourly basis) plus the lost contribution.
This is explained and illustrated in our free lecture on relevant costing.
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