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Hi Dear Tutor, I have a question
I took this example from Bpp study text “short-term decision” chapter
Special job will require 20 hours of skilled labour. The skilled workforce is paid $15 per hour and is working at full capacity. If the special job is undertaken, the skilled labour would be taken off the work that earns a contribution of $12 per hour,after deducting the costs of the labour and variable overheads of $1.5 per hour.
Labour cost of 20 hrs *15$ per hour=300
Variable overhead costs 20hrs * $1.50 per hour=30
Contribution forgone (lost contrubution) 20hrs * $12 per hour=240
total relevant cost======570
Ennerdale multiple choice question number 108
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
Selling price per unit—-100
Skilled labor cost per unit—-38
Other variable cost per unit-22
Contrubution =40
Labour hout per unit=38/9.50=4 hours per unit
Skilled labour —800* $9.50 labour cost per hout=7600
Lost contrubution (40/4=10*800)============8000
relevant cost ========================15600Variable cost per unit=====22
Direct labour hour per unit==4
variable cost per hour=22/4=5.5
variavle cost (800*5.5)-is not considered here? but above example as we can see that
“Variable overhead costs 20hrs * $1.50 per hour=30”
f the special job is undertaken, the skilled labour would be taken off the work that earns a contribution of $12 per hour,after deducting the costs of the labour and variable overheads of $1.5 per hour.
it says contribution after labour and variable cost!
The second example is more relevant as far as the exam is concerned.
The reason for the different in the treatment however is that in the first example the variable overheads are being incurred on a labour hour basis and therefore both labour and variable overheads will still be paid if the labour is moved to the new job.
In the second case the variable overheads are on a per unit basis and so they will not be paid if the labour is moved to the new job.
Since “direct variable cost per unit” is calculated in the following way based on standard cost card approach then we can break it down into two parts.Standard cost card usually shows per unit approach such as direct material cost per unit , direct labor cost per unit, variable overhead production per unit. At least they should mention it in the question variable cost is hour based or unit based.
1) variable cost per hour
2) labor hour per unit
in the second example labour hour per unit is 4 hours and if I place 4 hours in 2) then I can find variale cost per hour which is 5.5.
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