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Hi,
With the below question, I cannot figure out why $3 has been considered to calculate the relevant cost for the special order. Could you please explain why?
“In a manufacturing plant, the work force is operating at full capacity. The work force is paid a fixed rate of $12 per hour for a 35-hour week. This is a fixed weekly wage, although for the purpose of management accounting, direct labour costs are treated as a variable cost. A customer has asked for a special job to be done that would involve taking employees off regular work that earns a contribution of $15 per hour, after allowing for direct labour cost and variable overheads at $3 per hour. The company must decide whether to agree to the customer’s request for the work, and to set a price. The customers request is expected to take 10 hours” Relevant cost for labour for this job? Thank you
Hi there – sorry for the delay…
The relevant cost of labour (when it is taken from other work) is the cost of the labour plus the variable overheads (because they are on an hourly basis) plus the lost contribution.
This is explained and illustrated in our free lecture on relevant costing. Please watch this & return – it is the best way to see the explanation worked out for you ;
Thanks
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