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Hi John,
Can you help me with this, please?
I hope my question makes sense with out writting the example here. If not, I will write it later.
When calculating the most profitable use of direct labour with scarce resource after calculating the contribution of each product, I divided each for the hours they take to produce to get the contribution per hour. So I could rank them.
Looking the answer, the book divided the contribution by the direct labour cost per unit to get the contribution per $1 of direct labour. Which end up with a different answer.
It is just wrong what I did? Why?The same happen in a different question where materials were the scarce resource. I used Contribution/Kg used in a unit; The book used Contribution/$ Materials cost in a unit. But in this case we got the same ranking.
Thank you!!!!
In general terms, you should divide by the hours per unit (in the case of labour) or hours per Kg (in the case of materials).
Provided that the labour is all paid at the same rate per hour, and that the materials are all paid at the same price per kg, then dividing by the cost of labour or the cost of material will end up giving exactly the same ranking.
Without seeing the specific question, I cannot explain why things are different with the first question. (If it is a past exam question and you are still unsure then you don’t need to type it out – just say which question in which exam and then I can find it).
Thank you John.
The question is from Kaplan Revision Kit. Q60.
RST Company provide three services: R, S & T.
Service R Service S Service T
Fee charges to customers $100 $150 $160
Unit service costs:
Direct Materials 15 30 25
Direct Labour 20 35 30
Variable O/H 15 20 22
Fixed O/H 25 50 50All three services use the same type of labour which is paid $25 per hour.
Fixed O/H have been absorbed pn the basis of machine hours.
Answer:
Contribution per unit 50 65 83
Direct Labour cost per unit 20 35 30
Cont. per $1 of Dir. Labour 2.50 1.85 2.77
Ranking 2 3 1On my answer I divived the $25 that is the cost of labour per hour by the direct labour cost per unit to find out how many hours each service would take. After checking the answer I realised that I didnt need to complicate and should just use the information given but I wonder why did it give me a different answer.
Hours per unit 1.25 0.71 0.83
Contribution per hour 40 91.54 100
Ranking 3 2 1It is because you have divided the wrong way round!
If the labour cost for X is $20 per unit, and if about is paid $25 per hour, then it means that X is taking 20/25 = 0.8 hours per unit (not 1.25).
0.8 hours x $25 per hour = $20 per unit.
Same for the other two 🙂
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