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Relevant Costing

Forums › ACCA Forums › ACCA PM Performance Management Forums › Relevant Costing

  • This topic has 5 replies, 3 voices, and was last updated 10 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • September 28, 2014 at 1:05 pm #202036
    loh
    Member
    • Topics: 2
    • Replies: 1
    • ☆

    Hi there,

    I have a question:

    Company A needs to starts Project A and it needs 100 labour hours. The cost is $10 per hour. While, currently company A’s labours are working on other project (project B) and it is charging $15 per hour to the customer.

    My question is “What is my relevant cost?”
    It is $1,000 or $1,500? Since using own labours will give me opportunity cost of RM 1,500 for project A. Can hire other labours at $1,000 to minimize the cost and make it as my relevant costing?

    Thanks a lot.

    September 28, 2014 at 4:27 pm #202053
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    The relevant cost is $1,500.

    They will be paying the workers whatever happens, but if they do the project then they will be losing $15 per hour that they could otherwise be earning.

    If the question says that they can hire other workers at a cost of a $1,000, then the relevant cost would become $1,000 because that would be cheaper than losing the $1,500 from the other work. (But you do not assume this – it is only relevant if the question says that other workers are available.)

    September 30, 2014 at 10:05 am #202275
    Chris
    Member
    • Topics: 21
    • Replies: 251
    • ☆☆☆

    Hi John
    My approach to the above is slightly different and I just would like some clarity to ensure I am not missing the point (although I do come out to the same answer as you!).

    My calculation would be:
    $10 x 100 hours required = $1,000
    Lost contribution of other contract = $500 ($15 earned less $10 paid) = $5 x 100.

    I thought the calculation was for the contribution being lost by employing this labour – not the “sales” cost being lost.

    Perhaps I’m just getting my wires crossed but it’s the way this relevant cost has become embedded in my grey matter! Can you please advise?

    Kind Regards

    Chris

    September 30, 2014 at 7:53 pm #202653
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    It does not matter which way you approach it – what you are doing is fine 🙂

    In general it is the labour cost per hour plus the lost contribution per hour.

    Since in this question there are no other costs involved it is the same as the $15 per hour being charged.

    October 1, 2014 at 10:16 am #202789
    Chris
    Member
    • Topics: 21
    • Replies: 251
    • ☆☆☆

    Thanks John – much appreciated.

    October 1, 2014 at 4:52 pm #202844
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    You are welcome, Chris 🙂

  • Author
    Posts
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