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Hi, I saw a incremental cost question in Examkit and The first time i saw it. I was a bit lost until i looked at the answer.
Now, I came across a Question and again Its uncomman to solve it this way.
The Question asked that there is an order of 5000 units at $9. And should We accept it.
The Budgeted Costs and revenues were given.
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My Problems were :1) it said wee have 36,000 Hours capacity and we are budgeted to produce 35,000 units. And any extra Labor hour will cost 3.5 usd.
So, I Did it the relevant cost way, we have spare capacity of 1000 hours. So, Only reasonable way to Charge it just rest 4000 * 3.5 usd = 14000 for The contract
BUT , The solution calculated per unit Cost of existing Labour hours and it came out to be 2.14 and then it charged the spare capacity labour at 2.14 usd for 1000 hours.!!!2) there is fixed cost which includes salary of production manager, Who will leave if he won’t receive the pay raise of $5000. And any new orders won’t be fulfilled if he Leaves.
So, Its fixed cost even if we won’t do the Order we still need him to Produce Product. Isn’t it reasonable to “Not Charge it to The New order” under relevant accounting Principles.
This Incremental costing totally ignored the concept of relevant accounting and I first saw the term in lectures of relevant costing and Learned how to deal with it. I will Upload a link to the image of question,
It is a pure relevant costing question. I don’t understand why you write that it ignores the concept of relevant costing.
As far as the labour is concerned, it makes it clear that they have enough labour at the moment to be able to produce 36,000 units. Since they are only currently producing 35,000 units, for the 5,000 hours needed (at 1 hour per unit) the first 1,000 hours will be at the current rate of $2.14 per hour and the other 4,000 hours will be at the higher rate of $3.50 per hour.
Note 3 is poorly worded (it is not a real exam question) but is intended to mean that they will only have to pay $5,000 if they take any orders (but that they will not have to pay it if all they do is continue with the current production).
I don’t know where you found this question but it is important that you start practicing real past exam questions from your Revision Kit as soon as possible.
(I have deleted the links in your post because it is illegal for us to post links to copyright material 🙂 )
I was Just Revising chapters from Notes and then Going through the Textbook Questions. As soon as I finish revising Variances , I will start exam kit.
In the labor Note, We already had 36,000 hours which we were paying for whether we produce more or less, the 1000 hours were just idle time. We were already paying for the 1000 hours whether we take the order or not. So, Isn’t it the Sunk cost ?
So, Why we charged 2.14 per unit for 1000 units of the order ?The labour note did not say that they were already paying for 36,000 hours. It said they had the capacity of 36,000. At the moment they were only using (and therefore only paying) for 35,000 hours and so they can get 1,000 more hours at the same cost.
(Again, it is not terribly well worried and so it is good that you are moving to your Revision Kit soon 🙂 )
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