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In relevant costing chapter the example 2
in case of supervisor cost we save 2500 bonus but we have to pay 3500 for special order.so we took the differential cost that is 1000 extra that we need to pay
my question is related to machine overhead part.The special order need 6000 hrs but only 4000 available now and took away 2000 hrs from another job.
So opputunity cost cause of loss of contribution = 2000 x 2 =4000
machine overheads for special overhead = 6000 x 3 = 18000but cant we also include that since we taking that
2000 hrs from another job so we saving 2000 x 3 = (6000)total effect is 4000+18000 – 6000 = 16000
or incase of variable cost we account it entirely to a particular job so as to recover it….while incase of fixed cost we dont include it but since we earn contribution on selling, that contribution helps to recover that fixed cost
But we are not saving on the 2,000 hours taken from the other job – the running costs will still be payable.
Have you watched my lecture working through this example, because I do explain in the lecture.
(I do hope you are not using the notes without watching the free lectures. They are only lecture notes and it is in the lectures that I explain and expand on the notes. If you are not watching the lectures for any reason then you need to buy a Study Text from one of the ACCA approved publishers and study from there.)
i seen ur lectures and i understand you, but one thing i didnt get , that since we are not saving any hours and taking that 2000 hrs from another job would cost me same running cost as using it on this project.If that so that means theres no effect in terms of cost changing. then why to show it in relevant costing.
is it cause variable cost wouldn’t have incurred if we hadnt done the project, so its happening cause of undertaking the project and so should be charged to the project as relevant cost, while in case of fixed cost we still would incur the cost irrespective of doing the project or not. is that the reason?
Thank u sir for explanation.
Let me make up a simple example to explain.
Suppose the existing work has revenue of 20, running costs of 5, and other variable costs of 8. So the contribution is 7.
If the running costs are used instead for the other work, then we lose the revenue and save the other variable costs (we are still paying the running costs). So the amount lost (the relevant cost) is 20 – 8 = 12. This is the same (and always would be) as the lost contribution (7) plus the running costs (5).
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