So basically, in Q2, if there is material onsite that is in regular use, we value at the cost we could sell it for rather than the price paid for it, because we value at the price we could sell it for regardless of whether there is a contract? Am I reading this right? Perhaps I'm not.
J
John MoffatTutor·
No. If it is in regular use then the material taken for the contract needs to be replaced and so the relevant cost is the current cost of buying new material.
Have you watched our free lectures on this?
F
Feli·
Yes, that is why i was confused. i think i understand, it's all about new costs. if it's in regular use, we would use it for this contract and replace it anyway so we use the replacement. however, if the material couldn't be used for anything else and could be sold, we use the cost we could get for selling the material, because that's an opportunity cost? i believe that i have read the lecture now 3 times and i'm hoping i got the point.
J
John MoffatTutor·
correct :-)
A
Ansr·
Hi John,
In this scenario at Q-3, the workers are paid for hours that they actually work although there is plenty of idle time that will not be paid as they are not working, correct? so, the opportunity cost has to be considered as how, zero or $8 per hour – kindly explain as the answer here shows as zero but I got 40k as it is to be paid if work – idle time means not working?
O
Oto·
It means that the workers will be paid even if the company doesn't get the special order. That is why it is not a relevant cost.
P
Prashant·
Hi John- i understand from the 3rd question that there is idle time where workers can be utilized however im failing to understand they won't work for free in that time so why we haven't taken their $8/hour charge for idle time.
J
John MoffatTutor·
In this sort of question we assume that they are only paid for hours that they actually work.
A
Ansr·
In this scenario at Q-3, the workers are paid for hours that they actually work although there is plenty of idle time that will not be paid as they are not working, correct? so, the opportunity cost has to be considered as how, zero or $8 per hour - kindly explain as the answer here shows as zero but I got 40k as it is to be paid if work - idle time means not working?
T
tit·
can u please explain why in question 2 the current cost has been multiplied by the units required (2000kg) rather than on the units in inventory(1500kg)?PLease?
S
Suraj·
Help me understand Q2 and Q3, Since in Q2 it was stated that the material is in use we bought whole 2000units for 10$ p.u ie 20000$
and for Q3 it was that the material wasn't in use we valued at Material at Cost or Value whichever is higher and the remaning for 10$ p.u, ie 1500*9 + 500*10, 18500. Is this correct?
H
Hamza Lad·
On this question we need 2000kg material, however currently we have 1500 kgs of the material. so basically our relevant cost is the 500kg*10=5000. Plus selling cost of 1500kg *9=13500
so the answer is 18500
Help me to understand!
J
John MoffatTutor·
I do not think. you can have watched the lectures before attempting the test. The relevant cost of the 1,500 currently in inventory is the lost scrap proceeds of $9 per kg. The remaining 500 kg will need to be purchased at a cost of $10 per kg.
D
Divij·
I am a bit confused here, why are questions 2 and 3 repeated and asked as questions 4 and 5? What is the correct answer? I got $18,500 and $100,000....please tell me if I am right or wrong.
J
John MoffatTutor·
They are not repeated - the wording is different.
You can see the correct answers and the workings if you click on 'review quiz' after submitting your answers.
(Did you watch the lectures before attempting the quiz?)
D
Divij·
Extremely sorry, I should have been more alert while reading them, I just read the bold part and then started thinking. A mistake I will certainly not repeat.
J
John MoffatTutor·
OK :-)
H
Hamza Lad·
QN2. Why didn't you include the selling of 1500kg*9=13500?
But QN4 you have included, tell me the hidden trick
God will bless you!
B
Beatrice·
Hi John,
Many thanks for the great lectures! I got 80% for this one..
Please can you explain why the labour is a relevant cost on question 5 when we were going to pay it anyway. I thought it was only the $12 lost contribution.
Thanks,
Beatrice
J
John MoffatTutor·
We certainly will be paying the $8 anyway.
However, let me make up some figures so as to explain ?
Suppose the revenue per unit is $30, the materials are $10, and the labour is $8. So the contribution is $12.
If the labour is used on another contract, then we lose the revenue of $30, we save the materials of $10. We still pay the labour of $8 and so the net loss is 30 – 10 = $20. This is always going to be the same as the contribution (12) plus the labour (8).
Z
zhao·
Hello teacher. I think the relevant costs does not include the labour, for the salary is fixed cost in this question as it is.
Z
zhao·
Hello teacher. I think the relevant costs does not include the labour in this question, for the salary $8 is fixed cost as the question implies. The worker are in their position whether the new work come in or not, and actually you can't fire them casually.
J
John MoffatTutor·
It is fixed, but read my previous explanation carefully.
A
Alfat·
Hi John,
Could you please help me with explaining this answer from BPP PM workbook further question solutions regarding SECTION C question 66 AB.
b) Non- financial factors that must be considered in reaching the decision
The workforce
If the recommended course of action is undertaken, the workforce will produce enough units of X in the next 13 weeks to satisfy sales
demand over the next year (with 18 weeks supply of existing finished goods inventories and a further 35 weeks supply obtainable from
direct material inventories).
I cannot understand how the 13 weeks come about, as the company should produce X for extra 33 weeks to use their inventory of the raw materials before switching to produce Y. Could you please help me with this. If you could trace the question, please.
Thank you.
J
John MoffatTutor·
You must ask this sort of question in the Ask the Tutor Forum and not as a comment on a lecture.
K
KEVIN·
Sir, In question number 2, It said the materials needs to be replaced, so we skip the opportunity cost & take the current market price? If the material is in regular use, CURRENT PRICE should be chooses over opportunities cost?
J
John MoffatTutor·
Yes, and I do explain this in my free lectures.
K
KEVIN·
Your lectures are amazing sir, I am going through it. Thank you so much for helping all the students all around the world who cannot afford professional teaching !!
J
John MoffatTutor·
Thank you for your comment :-)
A
alaaeid·
in q 5
the answer is 100 000
but in the question is giving the contribution which is calculated after subtracting the 8 $ per hour
cm = p - vc ( labour and material )
why to calculate it again ?
J
John MoffatTutor·
We certainly will be paying the $8 anyway.
However, let me make up some figures so as to explain ?
Suppose the revenue per unit is $30, the materials are $10, and the labour is $8. So the contribution is $12.
If the labour is used on another contract, then we lose the revenue of $30, we save the materials of $10. We still pay the labour of $8 and so the net loss is 30 – 10 = $20. This is always going to be the same as the contribution (12) plus the labour (8).
K
Kamran·
Dear John,
Can you please explain it using some other example as well? i am still not clear on this. I still think that the labour cost is something we will pay anyway whether we take the new contract or not. By taking the new contract, only the change would be lost contribution of 60,000. How i prepare my mind that 60,000 is not the correct answer... I am not able to understand
J
John MoffatTutor·
I mistyped one figure in my previous reply, but I have now corrected it. So please read it again :-)
B
Biseko·
Hi John,
Can I relate this to the concept that labour cost is fixed in the short run.?
J
John MoffatTutor·
No. We only assume labour to be fixed in the short-term when using throughput accounting. In relevant costing questions then the way of dealing with labour depends on the wording of the question.
D
Doris·
Hello.
This is still unclear to me because the notes mention that losing 12$ of contributions (opportunity cost, relevant) means the workers move from the current project to the new one, they are not extra labour (Sunk costs). I already watched the full lecture but I am still confused.
How can I identify if the labour is relevant then?
DP: Very thanks for the lectures.
P
Piotr·
In question 5,
My answer was $60000
$12x5000hrs - contribution lost - relevant
$8 per hr - labour cost - committed - not relevant
Correct answer was $100000
($12+$8)x5000hrs
Labour paid $8 per hr - why are those costs not treated as committed costs as they are going to occur any way?
Thank you
P
Piotr·
I got it now - found the answer from the previous comments. Thank you
J
John MoffatTutor·
I am pleased you have now got it :-)
J
Jesse·
Hi John,
Thanks for the lectures and practice questions.
For Q2, I can't understand why we don't include the opportunity cost of selling the material in inventory ($1500 x 9) ?
Presumably, we would sell the material if the contract didn't go ahead? Shouldn't this be a relevant cost therefore?
Thanks in advance.
J
Jesse·
Is it because the material is used frequently?
J
John MoffatTutor·
Yes it is :-) It is in regular use and will need replacing.
N
Nikuze Mukundenkase·
thank you sir
J
John MoffatTutor·
You are welcome :-)
A
arish·
Respected sir ,
I have issue with ques no. 2
it says 1500kg material Originally cost $8 but answer shown in ques takes 2000 kg material with current cost of $10 which includes 1500 kgs as well.
Is this because $8 is sunk cost ?
If it is a sunk cost then why we are considering 1500kgs ?
J
John MoffatTutor·
The material is in regular use and so the 1,500 kgs need replacing and will cost the current purchase price. The $8 is a sunk cost and is irrelevant.
Did you watch my free lectures on relevant costing before attempting the test?
D
Dinuki·
100% :D
N
nelsonshinohamba·
Hi there,
I just want to understand the difference between question 2&4 and the difference between question 3&5. Somebody to please help me spot the difference?
J
John MoffatTutor·
In question 2 the material in inventory is in regular use, but in question 4 there is no other use for it.
In question 3 there is a substantial amount of idle time. In question 5 there is no idle time and they will have to be taken off other work.
Did you watch my free lectures on relevant costing before attempting the test?
C
chak lam·
Hi John,
For Q5, why do we need to take in account the working rate of $8?
I think it is the cost we need to pay anyway, the workers are just producing other product.
J
John MoffatTutor·
We certainly will be paying the $8 anyway.
However, let me make up some figures so as to explain :-)
Suppose the revenue per unit is $30, the materials are $10, and the labour is $8. So the contribution is $12.
If the labour is used on another contract, then we lose the revenue of $30, we save the materials of $10. We still pay the $12 and so the net loss is 30 - 10 = $20. This is always going to be the same as the contribution (12) plus the labour (8).
J
Jargalsaikhan·
Great answer, Great logic
W
wollyadex·
I think the answer to this question is $60,000 = 5000 x $12
The $8 is a sunk cost
it does not change as a result of taking the contract
The only change is the loss of contribution of $12 per hour
J
John MoffatTutor·
No - you are wrong.
Idle time is time they are not working but are still being paid for.
Given that they are being paid anyway there is no extra cost if they work on the new contract.
M
msdjacky·
In Q3 there is a enough idle time thatsy there will be no loss of contribution but we are using 5000 labour hour for special contract so we have to pay them $8 per hour. So I think it will be $40000 relevant cost because labour cost is variable in nature.
A
AJMAL·
Hello sir,
Hope you are doing well.
Sir i have a doubt in q5. Why we add regular labour cost . contribution=selling price- variable overhead. And labour cost is deducted in contribution and toeliminate the effect of deduction which is already paid we add labour cost . Is this the reason why add labour cost.
J
John MoffatTutor·
You are correct :-)
It is the same logic as that I use in my lecture example for machine electricity,
(If you are still at all unsure, look in the Ask the Tutor Forum - I have made up little examples to convince people who have asked :-) )
W
wollyadex·
I think the answer to this question is $60,000 = 5000 x $12
The $8 is a sunk cost
it does not change as a result of taking the contract
The only change is the loss of contribution of $12 per hour
A
afzal·
Did we add labour cost to get the selling price hence we can calculate the total revenue which is our opportunity cost?
T
tchrysopoulos·
Hi John,
In the solution of question 4 you state that for the calculation of the relevant cost as part of the inventory we need to multiple 1,500kg with $9 per kg which is the price the material could be sold. My query is why don't we use the inventory originally of $8 per kg instead of $9?
Thank you,
Theo
J
John MoffatTutor·
The original cost is always irrelevant because it is a sunk cost.
$9 is relevant. It is the opportunity cost because if the material was not used in the contract it would be sold for $9. By using it in the contract they are losing $9 that they would otherwise have received.
I do suggest that you watch my free lectures on relevant costing.
S
sirnicson·
It's tomorrow John,
You have been a breakthrough.
Thank you & seasons greetings!
J
John MoffatTutor·
I hope all goes well, and thank you for the comment :-)
F
furry·
Hi Sir,
Hope you are doing well. This is with regard to Q. 3 and 5
Q. 3 How could the relevant costing be nil. I understand that there is a substantial amount of idle time since there is no additional cost involved but why don't we include the lost contribution ?
Q. 5 Here we include the lost contribution which is okay but why are we including the wage cost because though we accept the contract or not, we should still pay the labours anyway ?
Hope you could understand my question
Kind regards,
Firnas
J
John MoffatTutor·
Q3: There is no lost contribution. There is plenty of idle time and so they can continue to do the current work as well and still earn the current contribution.
Q5: The do still pay the labour. So they lose the revenue from the existing work but save the other variable costs of the existing work (excluding labour). The revenue less the other variable costs is equal to the contribution plus the labour.
I do suggest you watch my free lectures before attempting the tests because I explain both of these points in the lecture (and both are common exam questions).
F
furry·
Thanks for your kind explanation sir :)
J
John MoffatTutor·
You are welcome :-)
M
max·
Dear John,
Based on the explanation, I believe we are assuming that labour cost is a variable cost in this question. However, I thought labour cost is typically considered a "fixed cost" in the short run for a business.
Do you suggest that by tellying us "the hourly wage" in the exam already suggests that the employees are paid by the amount of hours they work? Because in many cases in reality, companies still quote the hourly wage, but the monthly wage's actually fixed no matter you are idle or not.
Best,
Max
J
John MoffatTutor·
But we always assume direct labour to be a variable cost throughout Paper F2 and Paper F5 (except obviously in throughput accounting questions, but that is an exception)!!
R
Robert·
Hi John,
In question nr. 5 "taking them away from their other work" means losing contribution (based on the correct answer). I met a few examples where this does not necessarily mean that we lose the job only delaying the completion. Any hints on how the best I can identify the case from the wording? Thanks, Robert.
J
John MoffatTutor·
The wording will make it clear, and if that does apply then you do whatever is the cheapest (i.e. delay the work and pay any penalty involved, or don't delay and lose contribution)
R
Robert·
Thank you!
J
John MoffatTutor·
You are welcome :-)
A
Acca student·
In question 2 relevant cost is $10 because material is in regular use?
J
John MoffatTutor·
Yes - it is in regular use and therefore needs replacing.
J
Joslyn·
Thanks alot for the lecture, with your help I managed to understand this topic and did pretty well in this test
J
John MoffatTutor·
Thank you for the comment :-)
J
Jenna·
John,
I'm hoping I'm misreading something here, but is question 4 asking the exact same thing as question 2, but with different answers (20,000 for question 2 and 18,500 for question 4)?
Thanks,
J
Jenna·
Apologies, just seen where the questions vary (re the material being in regular use and then not in any other use). Ignore me :)
D
Debbie·
Hi John
In example 1 in the lecture we did not use the direct wages as a relevant cost - it was said that this was being paid already so regardless of what the workers were doing it was being paid. Surely this same scenario applies in the test? The company was already paying their wages to work on one project so why do we have to count it as a new relevant cost now? Is it because we are paying it and we are losing the contribution for the other project? But then surely you are gaining contribution on this new project? It just doesn't tie in with how it was explained in the lecture. Even in example 1 the supervisor's salary wasn't counted as a relevant cost as he would be paid anyway. Is this not the same? You were paying to work on project 1 now they are moving to project 2. I seem to be missing something big here.
Your lectures are amazing by the way - you explain things really well!
Debbie
J
John MoffatTutor·
I do actually explain this in the lecture, but here is a very little example which may convince you.
Suppose another job has selling price of 100, materials of 20 and about of 30 - so a contribution of 50.
If we use the labour somewhere else instead, we lose the revenue of 100, we save the materials of 20, but we will still be paying the labour so no saving there. The net amount we will lose by taking the labour to another job will be 100 - 20 = 80.
Which is the same as the contribution of 50 plus the labour taken of 30. :-)
D
Debbie·
Thanks very much- I was not looking at the big picture.I think it's easier to do the contribution lost but material gained - that makes more sense to me. Thanks for the explanation.
J
John MoffatTutor·
You are welcome :-)
B
Bushnell·
Dear john,
I would like to know why we are calculating for the $8 x 5000 labour hours for Q5 , since the labour hour have already paid ?
J
John MoffatTutor·
They will be paying the labour whatever happens and therefore will lose the revenue from the other product and will save the other variable costs from the other product (but not the labour). The revenue less the other variable costs, is the same as the labour plus the contribution.
For a full explanation you need to watch the free lecture - I obviously cannot type out the whole lecture here :-)
Z
zyles·
Hello Sir,
I have watched your lecture and I cannot understand why we should consider the $40000 paid to labour as an additional cost, because whether we take the contract or not, we would still have to pay that $40000 to the existing labour.
Could you please explain why it is an additional cost there?
Regards
Aminath
J
John MoffatTutor·
I did explain in my previous answer (above!!).
Let me give you an example:
Suppose the existing product has a selling price of 100, labour of 20, and other variable costs (materials etc) of 50. So a contribution of 30.
Suppose the labour is moved to some new work and so we lose the existing product. As a result we lose the sales revenue of 100. We save the materials etc, of 50. (We don't save labour because they will still be paid.
So the loss is 100 - 50 = 50 and this is the relevant cost. That is exactly the same (and always will be) as the contribution plus the labour (30 + 20 = 50).
G
Gary·
A company needs 5,000 hours of labour for a contract they have been asked to quote for.
The work currently being carried out by our employees is generating a contribution of $12 per hour, although there is currently a substantial amount of idle time.
Our workers are paid at the rate of $8 per hour.
What is the relevant cost of the labour required for the contract?
Should this be 60K.
Lost contribution per hour * the number of hours needed (5000) for the project?
So $12*5000 hours?
J
John MoffatTutor·
The answer in the test is correct.
There is a substantial amount of idle time and therefore there is no lost contribution using about on the new contract and there is no extra labour cost involved.
P
poezarphyu·
Dear John,
please help me to expalin for second question.
I understand this question and answer .because of the labour hour is idle time,there is no need to charge for labour chargres for contract.
(1) A company needs 5,000 hours of labour for a contract they have been asked to quote for.
The work currently being carried out by our employees is generating a contribution of $12 per hour, although there is currently a substantial amount of idle time.
Our workers are paid at the rate of $8 per hour.
What is the relevant cost of the labour required for the contract?
But I don't understand this answer for the following question.
(2 ) A company needs 2,000 kg of material for a contract it has been asked to quote for. They currently have 1,500 kg in inventory, and the material has no other use.
The inventory originally cost $8 per kg., the current cost is $10 per kg., and the material could be sold for $9 per kg..
What is the relevant cost for the material required for the contract?
1500kg of inventory is no other use, so the relevant cost should calculated for 500kg x $10 only and
I feel confusing whether Lost contribution(1500kg x ($9-$8) should include or not also.
J
John MoffatTutor·
You do need to watch our free lectures on this because it is all covered in the lectures.
For question (2), 500kg are not in inventory and therefore need to be purchased, so 500 x $10 = $5,000
Because the 1500 kg have no other use and work therefore otherwise be sold for $9, the relevant cost is the lost income of 1,500 x $9 = $13,500 (an opportunity cost).
So the total relevant cost is therefore $18,500.
(The $8 per kg originally paid is not relevant - it has already been paid whatever happens (and is a sunk cost).)
Again, I really do suggest that you watch our lectures.
C
cdrisceoil·
Hi John,
Test is stating the answer for the above question as $20,000 and not $18,500 as you have set out above.
,
Thanks,
Colm
J
John MoffatTutor·
No it does not
You are looking at a different question which says that the material is in regular use.
A
aputu·
i understand this, thank you
J
John MoffatTutor·
You are welcome :-)
Z
zimuto·
Where can i view the answers for multiple choice questions. The correct way to do it.
J
John MoffatTutor·
The software at the moment does not allow us to show the workings - only what the correct answer is.
If you do not get the correct answer and are not clear why (assuming that you have watched the lectures first), then copy and paste the question in the Ask the Tutor Forum and I will explain.
Have you watched our free lectures on this?
In this scenario at Q-3, the workers are paid for hours that they actually work although there is plenty of idle time that will not be paid as they are not working, correct? so, the opportunity cost has to be considered as how, zero or $8 per hour – kindly explain as the answer here shows as zero but I got 40k as it is to be paid if work – idle time means not working?
and for Q3 it was that the material wasn't in use we valued at Material at Cost or Value whichever is higher and the remaning for 10$ p.u, ie 1500*9 + 500*10, 18500. Is this correct?
so the answer is 18500
Help me to understand!
You can see the correct answers and the workings if you click on 'review quiz' after submitting your answers.
(Did you watch the lectures before attempting the quiz?)
But QN4 you have included, tell me the hidden trick
God will bless you!
Many thanks for the great lectures! I got 80% for this one..
Please can you explain why the labour is a relevant cost on question 5 when we were going to pay it anyway. I thought it was only the $12 lost contribution.
Thanks,
Beatrice
However, let me make up some figures so as to explain ?
Suppose the revenue per unit is $30, the materials are $10, and the labour is $8. So the contribution is $12.
If the labour is used on another contract, then we lose the revenue of $30, we save the materials of $10. We still pay the labour of $8 and so the net loss is 30 – 10 = $20. This is always going to be the same as the contribution (12) plus the labour (8).
Could you please help me with explaining this answer from BPP PM workbook further question solutions regarding SECTION C question 66 AB.
b) Non- financial factors that must be considered in reaching the decision
The workforce
If the recommended course of action is undertaken, the workforce will produce enough units of X in the next 13 weeks to satisfy sales
demand over the next year (with 18 weeks supply of existing finished goods inventories and a further 35 weeks supply obtainable from
direct material inventories).
I cannot understand how the 13 weeks come about, as the company should produce X for extra 33 weeks to use their inventory of the raw materials before switching to produce Y. Could you please help me with this. If you could trace the question, please.
Thank you.
the answer is 100 000
but in the question is giving the contribution which is calculated after subtracting the 8 $ per hour
cm = p - vc ( labour and material )
why to calculate it again ?
However, let me make up some figures so as to explain ?
Suppose the revenue per unit is $30, the materials are $10, and the labour is $8. So the contribution is $12.
If the labour is used on another contract, then we lose the revenue of $30, we save the materials of $10. We still pay the labour of $8 and so the net loss is 30 – 10 = $20. This is always going to be the same as the contribution (12) plus the labour (8).
Can you please explain it using some other example as well? i am still not clear on this. I still think that the labour cost is something we will pay anyway whether we take the new contract or not. By taking the new contract, only the change would be lost contribution of 60,000. How i prepare my mind that 60,000 is not the correct answer... I am not able to understand
Can I relate this to the concept that labour cost is fixed in the short run.?
This is still unclear to me because the notes mention that losing 12$ of contributions (opportunity cost, relevant) means the workers move from the current project to the new one, they are not extra labour (Sunk costs). I already watched the full lecture but I am still confused.
How can I identify if the labour is relevant then?
DP: Very thanks for the lectures.
My answer was $60000
$12x5000hrs - contribution lost - relevant
$8 per hr - labour cost - committed - not relevant
Correct answer was $100000
($12+$8)x5000hrs
Labour paid $8 per hr - why are those costs not treated as committed costs as they are going to occur any way?
Thank you
Thanks for the lectures and practice questions.
For Q2, I can't understand why we don't include the opportunity cost of selling the material in inventory ($1500 x 9) ?
Presumably, we would sell the material if the contract didn't go ahead? Shouldn't this be a relevant cost therefore?
Thanks in advance.
I have issue with ques no. 2
it says 1500kg material Originally cost $8 but answer shown in ques takes 2000 kg material with current cost of $10 which includes 1500 kgs as well.
Is this because $8 is sunk cost ?
If it is a sunk cost then why we are considering 1500kgs ?
Did you watch my free lectures on relevant costing before attempting the test?
I just want to understand the difference between question 2&4 and the difference between question 3&5. Somebody to please help me spot the difference?
In question 3 there is a substantial amount of idle time. In question 5 there is no idle time and they will have to be taken off other work.
Did you watch my free lectures on relevant costing before attempting the test?
For Q5, why do we need to take in account the working rate of $8?
I think it is the cost we need to pay anyway, the workers are just producing other product.
However, let me make up some figures so as to explain :-)
Suppose the revenue per unit is $30, the materials are $10, and the labour is $8. So the contribution is $12.
If the labour is used on another contract, then we lose the revenue of $30, we save the materials of $10. We still pay the $12 and so the net loss is 30 - 10 = $20. This is always going to be the same as the contribution (12) plus the labour (8).
The $8 is a sunk cost
it does not change as a result of taking the contract
The only change is the loss of contribution of $12 per hour
Idle time is time they are not working but are still being paid for.
Given that they are being paid anyway there is no extra cost if they work on the new contract.
Hope you are doing well.
Sir i have a doubt in q5. Why we add regular labour cost . contribution=selling price- variable overhead. And labour cost is deducted in contribution and toeliminate the effect of deduction which is already paid we add labour cost . Is this the reason why add labour cost.
It is the same logic as that I use in my lecture example for machine electricity,
(If you are still at all unsure, look in the Ask the Tutor Forum - I have made up little examples to convince people who have asked :-) )
The $8 is a sunk cost
it does not change as a result of taking the contract
The only change is the loss of contribution of $12 per hour
In the solution of question 4 you state that for the calculation of the relevant cost as part of the inventory we need to multiple 1,500kg with $9 per kg which is the price the material could be sold. My query is why don't we use the inventory originally of $8 per kg instead of $9?
Thank you,
Theo
$9 is relevant. It is the opportunity cost because if the material was not used in the contract it would be sold for $9. By using it in the contract they are losing $9 that they would otherwise have received.
I do suggest that you watch my free lectures on relevant costing.
You have been a breakthrough.
Thank you & seasons greetings!
Hope you are doing well. This is with regard to Q. 3 and 5
Q. 3 How could the relevant costing be nil. I understand that there is a substantial amount of idle time since there is no additional cost involved but why don't we include the lost contribution ?
Q. 5 Here we include the lost contribution which is okay but why are we including the wage cost because though we accept the contract or not, we should still pay the labours anyway ?
Hope you could understand my question
Kind regards,
Firnas
Q5: The do still pay the labour. So they lose the revenue from the existing work but save the other variable costs of the existing work (excluding labour). The revenue less the other variable costs is equal to the contribution plus the labour.
I do suggest you watch my free lectures before attempting the tests because I explain both of these points in the lecture (and both are common exam questions).
Based on the explanation, I believe we are assuming that labour cost is a variable cost in this question. However, I thought labour cost is typically considered a "fixed cost" in the short run for a business.
Do you suggest that by tellying us "the hourly wage" in the exam already suggests that the employees are paid by the amount of hours they work? Because in many cases in reality, companies still quote the hourly wage, but the monthly wage's actually fixed no matter you are idle or not.
Best,
Max
In question nr. 5 "taking them away from their other work" means losing contribution (based on the correct answer). I met a few examples where this does not necessarily mean that we lose the job only delaying the completion. Any hints on how the best I can identify the case from the wording? Thanks, Robert.
I'm hoping I'm misreading something here, but is question 4 asking the exact same thing as question 2, but with different answers (20,000 for question 2 and 18,500 for question 4)?
Thanks,
In example 1 in the lecture we did not use the direct wages as a relevant cost - it was said that this was being paid already so regardless of what the workers were doing it was being paid. Surely this same scenario applies in the test? The company was already paying their wages to work on one project so why do we have to count it as a new relevant cost now? Is it because we are paying it and we are losing the contribution for the other project? But then surely you are gaining contribution on this new project? It just doesn't tie in with how it was explained in the lecture. Even in example 1 the supervisor's salary wasn't counted as a relevant cost as he would be paid anyway. Is this not the same? You were paying to work on project 1 now they are moving to project 2. I seem to be missing something big here.
Your lectures are amazing by the way - you explain things really well!
Debbie
Suppose another job has selling price of 100, materials of 20 and about of 30 - so a contribution of 50.
If we use the labour somewhere else instead, we lose the revenue of 100, we save the materials of 20, but we will still be paying the labour so no saving there. The net amount we will lose by taking the labour to another job will be 100 - 20 = 80.
Which is the same as the contribution of 50 plus the labour taken of 30. :-)
I would like to know why we are calculating for the $8 x 5000 labour hours for Q5 , since the labour hour have already paid ?
For a full explanation you need to watch the free lecture - I obviously cannot type out the whole lecture here :-)
I have watched your lecture and I cannot understand why we should consider the $40000 paid to labour as an additional cost, because whether we take the contract or not, we would still have to pay that $40000 to the existing labour.
Could you please explain why it is an additional cost there?
Regards
Aminath
Let me give you an example:
Suppose the existing product has a selling price of 100, labour of 20, and other variable costs (materials etc) of 50. So a contribution of 30.
Suppose the labour is moved to some new work and so we lose the existing product. As a result we lose the sales revenue of 100. We save the materials etc, of 50. (We don't save labour because they will still be paid.
So the loss is 100 - 50 = 50 and this is the relevant cost. That is exactly the same (and always will be) as the contribution plus the labour (30 + 20 = 50).
The work currently being carried out by our employees is generating a contribution of $12 per hour, although there is currently a substantial amount of idle time.
Our workers are paid at the rate of $8 per hour.
What is the relevant cost of the labour required for the contract?
Should this be 60K.
Lost contribution per hour * the number of hours needed (5000) for the project?
So $12*5000 hours?
There is a substantial amount of idle time and therefore there is no lost contribution using about on the new contract and there is no extra labour cost involved.
please help me to expalin for second question.
I understand this question and answer .because of the labour hour is idle time,there is no need to charge for labour chargres for contract.
(1) A company needs 5,000 hours of labour for a contract they have been asked to quote for.
The work currently being carried out by our employees is generating a contribution of $12 per hour, although there is currently a substantial amount of idle time.
Our workers are paid at the rate of $8 per hour.
What is the relevant cost of the labour required for the contract?
But I don't understand this answer for the following question.
(2 ) A company needs 2,000 kg of material for a contract it has been asked to quote for. They currently have 1,500 kg in inventory, and the material has no other use.
The inventory originally cost $8 per kg., the current cost is $10 per kg., and the material could be sold for $9 per kg..
What is the relevant cost for the material required for the contract?
1500kg of inventory is no other use, so the relevant cost should calculated for 500kg x $10 only and
I feel confusing whether Lost contribution(1500kg x ($9-$8) should include or not also.
For question (2), 500kg are not in inventory and therefore need to be purchased, so 500 x $10 = $5,000
Because the 1500 kg have no other use and work therefore otherwise be sold for $9, the relevant cost is the lost income of 1,500 x $9 = $13,500 (an opportunity cost).
So the total relevant cost is therefore $18,500.
(The $8 per kg originally paid is not relevant - it has already been paid whatever happens (and is a sunk cost).)
Again, I really do suggest that you watch our lectures.
Test is stating the answer for the above question as $20,000 and not $18,500 as you have set out above.
,
Thanks,
Colm
You are looking at a different question which says that the material is in regular use.
If you do not get the correct answer and are not clear why (assuming that you have watched the lectures first), then copy and paste the question in the Ask the Tutor Forum and I will explain.