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Hello
I was reading BPP study text, the relevant cost of labour. The book gives an example of what consists of relevant cost for labour and it states that when there’s idle capacity amongst the workforce, that idle capacity paid for a special work is not relevant cost. But when there is no idle capacity, and the workforces is made to work on special project, then the labour cost is a relevant cost. Why is that?
Also in the book it says that the variable overhead that would have incurred on the existing job is also considered relevant cost for the purpose of the special job. I do not understand the logic behind it.
I do explain all of this in my free lectures on relevant costing!
The relevant costs for a new contract are any incremental (extra) costs that are incurred as a result of doing the new contract.
If at the moment there is idle capacity then this means that there are at the moment hours when labour is not doing anything but are still being paid. Using some of these hours on a new contract will not mean paying them any more because they are being paid anyway. Therefore there is no extra cost.
If there is no idle capacity then they have to be paid more for the extra work on the new contract, and the extra cost is therefore a relevant cost.
Variable overheads are only incurred when hours are actually being worked. If the new contract means that more hours are being worked then there will be more variable costs.
I do suggest that you watch my free lectures on relevant costing. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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