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There is a question I do not understand. it is the question 21 in the revision kit. the relevant cost of the skilled labor is 100 per hour. But I think this cost should be 115 per hour, because the relevant cost of Labor should be direct labor cost PLUS con’t forgone by diverting labor to another job. So in the question why it does not plus the direct labor cost of 15 per hour and the total relevant cost is 115 per hour?
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I don’t have the question but I will tell you the rules of determine relevant cost for labour, ask some questions:
1. Any spare capacity (free time)? If yes, relevant cost = 0, if no move on.
2. Can hire labour? If yes, relevant cost = basic rate of new labour, if no move on.
3. Relevant cost will be the lower of “overtime work” and “opportunity cost (bring labour from other work to this work) + basic rate”
Okay look at the question again 🙂I am just making more simple to understand ckseah points but i didnt understand what is ur 3rd point about.
if spare capacity exists= nil cost
1: if full capacity and can hire only ( no choice) = cost of hiring the outside labour
2: if full capacity and cant hire ( no choice) then= cost of direct labour+ opportunity cost + (overtime if any)IF u have choice in the scenario between 1 and 2 then we should choose the lower between them, the reason because to minimize cost e.g choice 1 is greater than 2, if we take choice 1 then it doesnt cause damage to us but the price we quote to customer will be high and u know customer will always want lower price. Hope its understandable 🙂
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This discussion has been most helpful. Thanks a lot!
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