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Hi,
I have a confusion regarding relevant costing specifically about labour when there is full capacity and can’t hire more labour , so in this case relevant cost is loss contribution + variable labour cost….. Now if we look at the concept we had already incurred the labour cost wether we divert the labour to new project or not, its just like sunk cost then why are we adding labour cost along with loss contribution . Plz explainI will explain, but this is relevant to Paper PM and not to Paper MA !!
Suppose we are making a product that has a selling price of $100, a material cost of $30, a labour cost of $10, and takes 1 hour to produce.
So the contribution per unit is 100 – 30 – 10 = $60.
If we take away 1 hour of labour and use it for another job, then we lose the one unit that we are currently making. So we lose the revenue of $100 but we will save the materials of $30. (The labour will stay be being paid). So we lose $70 and this is the relevant cost. This is the same (and is always the same) as the contribution of $60 plus the labour of $10.
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