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Hi Sir
I have a question in calculating the incremental cost for the hotel. In note 1 under staff costs we are told that the permanent staff are paid regardless of their working hours. However under temporary staff we are told that half the staff are unaffected by the change in hours, while the other half had reduced hours to reflect the reduced occupancy rate.
My question is, if we subtracted the permanent staff cost from the total staff cost, why did we not do the same for the 50% temporary workers whose wages were unaffected by the reduction in hours? I can understand why we include the wages of the staff with a reduction in hours, but why do we include the staff whose wages are not affected?The permanent staff will be paid for January whether or not the hotel is closed, and therefore their wages are not relevant for the decision.
The temporary staff are paid for the hours they work and the question says that they will continue to work if the hotel stays open. Therefore if the hotel does not stay open in January then none of the temporary staff will work and none will be paid. So the cost of all of the temporary staff is relevant when making the decision.
Oh I see. Thanks a lot Sir.
As an aside, this would be a relevant costing question right? Because in the revision kit this was under pricing decisions…It is relevant costing, but we need relevant costing often to decide on selling prices.
Hi,
I have a small doubt in the question, in the outflow details such as staff cost, maintenance costs, the data is for two months as specified in the question and we have to calculate the incremental cash flows for the month of January (31 days), so how come in answer sheet the data is considered as 1 month for all cost values?
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