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Hello John,
December 2014 Question 3, Hi Life Co.
In note 2,What does the examiner mean by workers being paid for overtime at ‘a time and a half’?
I think it’s why I don’t understand why the overtime was paid at $24 in the answer as well.
I think I’ve got it. Their overtime will be paid at half of the normal pay right?
I think you may mean right, but you haven’t typed it right 🙂
Overtime will be paid at normal rate plus half of normal rate.
please sir i need help to understand the concept behind this question.
Q-the company wants to find the relevant cost of materials of this special contract.
Material x has scrap value of $0.50 per kg and replacement cost of $5.50per kg
The contract requires 10 kg of of Material x. There are 250 kg of Material x in the inventory which was purchased by mistake 2 years ago.
if Material x is modified at a cost of $2 per kg it can be used as a substitute for material Y which is in regular use and currently costs $6Ans- there are two options either scrap value of 50 p per kg or use as replacement cost for material Y which would save us 6-2=$4
the later is preferable option hence the relevant cost for 10 kg is $40.problem- we are asked to find out the relevant “cost” right. i understadn modifying and using material Y as substitute is beneficial for the company. but between the two options why dont we choose the lower cost which is the scrap value of 50p?
as the basic intention of any company would be to reduce their costs where ever they can.To get the relevant cost, you first have to decide what they would prefer to do with material X if they did not do the contract.
If they did not do the contract they could either scrap it and earn $0.50, or instead they could spend $2, and use it to save $6 on buying Y – a net saving of $4.00
They would prefer to save $4 than earn $0.50, and so that would be their decision if the did not do the contract and they would save $4.
By doing the contract they will not save the $4, and so the relevant cost is $4.
So basically when we have two opportunity costs, we pick the higher of the two as our relevant cost and when we’re deciding on two replacement costs, we pick the lower as our relevant cost. Correct?
No.
If there is more than one option available if we don’t do the contract, then we identify whichever of the two options gives the most income (or the biggest saving).
The relevant cost for the contract is the cost or lost income (opportunity cost) of that choice.
If there are two alternatives that can be used for the contract, then we choose the one with the least cost.
I do suggest that you watch my free lectures on relevant costing.
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