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Relevant Cost of Labour

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Relevant Cost of Labour

  • This topic has 9 replies, 3 voices, and was last updated 1 week ago by LMR1006.
Viewing 10 posts - 1 through 10 (of 10 total)
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  • May 19, 2023 at 5:40 pm #684690
    VikasK
    Participant
    • Topics: 56
    • Replies: 83
    • ☆☆

    VV Company has been asked to quote for a special contract. The contract requires
    100 hours of labour. However, the labourers, who are each paid $15 per hour, are working
    at full capacity.

    There is a shortage of labour in the market. The labour required to undertake this special
    contract would have to be taken from another contract, Z, which currently utilises
    500 hours of labour and generates $5,000 worth of contribution.

    If the labour was taken from contract Z, then the whole of contract Z would have to be
    delayed, and such delay would invoke a penalty fee of $1,000.
    What is the relevant cost of the labour for the special contract?

    Question- Sir although i understood that 1000 would be a relevant Cost but why will (15* 100) would also be a relevant Cost?

    Because any how labour was to be paid $ 15/per hour. Even if they were just sitting idle

    May 19, 2023 at 7:21 pm #684692
    LMR1006
    Keymaster
    • Topics: 0
    • Replies: 80
    • ☆☆

    However, the labourers, who are each paid $15 per hour, are working at full capacity. There is a shortage of labour, so if they are used on the special contract then that will be the 100 hours of labour at $15 as well? It’s an opportunity cost…….

    May 19, 2023 at 8:45 pm #684695
    VikasK
    Participant
    • Topics: 56
    • Replies: 83
    • ☆☆

    Sorry Sir. But i couldn’t understood.
    We haven’t lost the contribution from the contract even even we are shifting the labours from the contract Z.

    So whether they work on Z or work on this special contract, won’t it be the same.

    May 19, 2023 at 10:49 pm #684698
    LMR1006
    Keymaster
    • Topics: 0
    • Replies: 80
    • ☆☆

    This question will not mean losing contract Z , but will just mean delaying contract Z.

    Therefore we will still get the contribution from Z, but we will have to pay for more labour (because they will be working on Z and on the special contract) and we will have to pay the penalty because Z will be delayed.
    So the relevant cost is (100 x $15) + 1,000.

    May 20, 2023 at 3:32 pm #684734
    VikasK
    Participant
    • Topics: 56
    • Replies: 83
    • ☆☆

    Sir does it mean that. Since the labour are paid on $/ hr basis, so once done with the special contract we will shift back to Contract Z and her the work done?.

    So the 100 hrs that time are the incremental cost?

    May 20, 2023 at 5:11 pm #684743
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 52452
    • ☆☆☆☆☆

    Yes – just as written in the previous reply.

    May 20, 2023 at 8:12 pm #684749
    VikasK
    Participant
    • Topics: 56
    • Replies: 83
    • ☆☆

    Sir don’t take me wrong. I just want to clarify that, workers are already operating at full capacity, so if they perform the special contract and then shift back to Contract Z.

    Provided there is already full capacity, would they be doing the work on Z during hours other than the normal working hours? Such as an Overtime.

    Since, we have been not provided any info about Overtime Premium we have just taken the Normal Pay Rate.

    May 21, 2023 at 11:21 am #684768
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 52452
    • ☆☆☆☆☆

    They are not working overtime. They simply work on the new contract and then do the work they were going to have done later when they do have the time available.

    May 21, 2023 at 3:18 pm #684780
    VikasK
    Participant
    • Topics: 56
    • Replies: 83
    • ☆☆

    Sir if they are doing that when the time is available, that means they would be performing the work during their idle capacity.

    In that case that should not be a relevant Cost.

    May 21, 2023 at 5:22 pm #684783
    LMR1006
    Keymaster
    • Topics: 0
    • Replies: 80
    • ☆☆

    What idle time?
    Does it not say….
    However, the labourers, who are each paid $15 per hour, are working at full capacity.

    They are not idle, or working overtime for the contract
    As explained already so many times….
    They work on the new contract and then transfer back to their original work.

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