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relevant cost

VVipin14y ago
John Robertson, a self employed builder, will need to be on site whilst the building work is performed. He therefore intends to do 800 hours of the skilled labour himself. The remainder will be hired on an hourly basis. The current cost of skilled labour is $12 per hour. If john robertson does not undertake the building work for this customer he can work as a skilled worker for other builders at a rate of $12 per hour.
what is the relevant cost if john robertson is intend to work himself in the new contract?
pls help, since the figure is $12 per hour, i got puzzled.
John MoffatJohn MoffatTutor14y ago#1
It is an opportunity cost. If he did not do the job then he could be earning $12 an hour. By doing the job himself he is losing income that he could have earned.
Ppavanpavanmehta14y ago#2
in a chapter 13 example 1 you have taken fixed cost different in original and flexed
budget as per unit production.
in a gtg guide one of the examples they have taken fixed same in originial and flexed budget.
budgeted production and sales-5000 unit
actual produced and sold-5400 unit
fixed production overhead 6 hours @1=6
they have taken 30,000 fixed overhead in both original and flexed budget.
can you please tell why is it difference?
Ppavanpavanmehta14y ago#3
in a chapter 13 example 1 for sales volume variance you have taken
standard profit per unit.in a gtg guide one of the examples they have taken
standard price per unit.
standard, unit, price, cost, actual, unit, price, cost,
A 2000 4 3.5 2200 4.10 3.7
B 2500 5 4 2000 5.25 4.3
C 1750 6 5.25 2000 5.75 5.75

sales volume variance=A= 2200-2000X4=800
B= 2000-2500X5=2500
C=2000-1750X6=1150

Can you please tell me why they have taken sales price and you sales profit?
John MoffatJohn MoffatTutor14y ago#4
In answer to your first question:

It depends why you are flexing the budget. If you are simply asked to produce a flexed budget then you would usually leave fixed overheads the same - they obviously should not change with the level of production.

However, in chapter 13, the reason we are flexing the budget is to explain variances. If we are using absorption costing, then the fixed overhead variances are more complicated and it is because using a standard profit per unit assumes that the fixed overheads are charged per unit (which assumes therefore that fixed overheads flex). The flexing of the budget at the start of the chapter is to help explain what is happening. If you watch the lecture this point is made clear.
John MoffatJohn MoffatTutor14y ago#5
In answer to your second question:

If you are wanting simply to explain the difference in revenue, then you take the sales price.

However, in the exam we are always calculating variances to explain why the profit (or contribution) is different from budget. Therefore we always calculate the sales volume variance using the standard profit (or contribution if marginal costing) per unit.
Ppavanpavanmehta14y ago#6
Thank you so much. It is very helpful.
John MoffatJohn MoffatTutor14y ago#7
You are welcome
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