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Greetings Sir,
Is there any scenario of relevant cost of labour and variable overheads? how can we proceed with the same.
Thank you in advanceYou can certainly be asked for the relevant cost concerning labour and concerning variable overheads. As to how you proceed it depends on the circumstances described in the question.
If, for example, labour is being used for a new project and labour is limited (so it means losing existing production), then the relevant cost of the labour per hour is the lost contribution per hour plus the labour cost per hour. If variable overheads are charged on a labour hour basis, then the same applies to the variable overheads.
1) A special job would require 50 hours of labor time. Employees are paid $10 per hour. The company permanently employs 5 workers with a working capacity of 50 hours a week. Currently, actual working hours amounts to 210 hours. The extra hours would be worked in overtime, for which the additional pay is $12.50 per hour.
2) A special job would require 50 hours of labor time. Variable overheads are incurred at $2 per labor hour. The company permanently employs 5 workers with a working capacity of 50 hours a week. Employees are paid $10 per hour. Currently, actual working hours amounts to 210 hours. The extra hours would be worked in overtime, for which the additional pay is $12.50 per hour.
3) A special job will require 20 hours of skilled labor. The skilled workforce is paid $15 per hour and is working at full capacity. If the special job is undertaken, the skilled labor would be taken off other work that earns a contribution of $12 per hour, after deducting the costs of the labor and variable overheads of $1.5 per hour.
We are presented here with three different scenarios, could you please explain if there would be a difference in their workings?
If its the same could you please explain any of the example?Why are you attempting questions for which you do not have answers? You should be using a Revision Kit from one of the ACCA Approved Publishers – they have answers and explanations!
Also, have you not watched my free lectures on relevant costing?
1) The extra cost will be 10 hours at $12.50 per hour
2) The labour cost is the same as in (1). In addition there are overheads for 50 hours at $2 per hour.
3) The cost will be 20 hours at (12 + 15 + 1.50) per hour
In relation to your 3rd answer
Since,
Contribution of $12 per hour, after deducting the costs of the labor and variable overheads of $1.5 per hour.Sir,
Doesn’t it mean that the actual contribution excludes $1.5 and thus if we include $1.5 then contribution will reduce rather than increase?No. As nmenon has typed it, the question says that the labour and the variable overheads have been deducted in arriving at the contribution of $12 per hour.
The relevant cost is the lost contribution plus the labour and variable overhead costs.
Thank you for the response, sir.
Yes sir I did go through your lecture on relevant costing, had a small doubt when it came to dealing with labour and variable overhead
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