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A contract is under consideration that requires 400 hours to complete. There are 150 hours of spare labor capacity.
The remaining hours for the contract can be found either by weekend overtime working paid at double the normal rate of pay or by diverting labor from the manufacture of product QZ. If The contract is undertaken and and labor is diverted, then sales of product QZ will be lost. Product Qz takes three Labour hours per unit to manufacture and makes a contribution of $12 per unit. The normal rate of pay for labor is $9 per hour.
What is the total relevant cost of labor for the contract ?
I got $3250; I am uncertain if this answer is correct for I do not understand the question.
Can someone assist.
Think this comes down to the exact meaning of the spare labour capacity.The relevant cost of using the QZ labour for the product is the lost contribution of four dollars an hour which leads to a cost of a thousand dollars given 250 hours needed.It would be correct to use this as overtime cost would be higher.Not sure how helpful this response will be to you.
Unfortunately not really I mean I subtracted the 150 spare capacity hours from the 400 to get 250 but I do not understand the question so I do not really understand why I did that just did it because of common sense but not of understand of the topic.
The key to this is to recognise that a cost can only be relevant if it is all of the following-
1.A future cost.
2.Avoidable
3.Involve a cash flow.
This means that costs that don’t involve cash flows such as depreciation are not relevant.Also committed costs are not relevant and neither are past costs.Hope the above is of at least some help.is there any link that i can find with an article on spare capacity; my text book did not have much information but ive been encountering many questions with this included.
I found the following-
https://accounting-simplified.com/management/relevant-costing/labor.html
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