RELEVANT COSTING

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May 26, 2022 at 5:13 pm #656512
Eunice03
- Topics: 43
- Replies: 38
29
A company uses its direct labour workforce to make a product for which the sales price and unit
cost are as follows:
The workforce is operating at full capacity and it is not possible to obtain any additional labour
hours in the near future. A customer has asked the company to perform a special job that would
require 20 hours of direct labour time.
Required
What would be the relevant cost of diverting labour from its existing work to perform the special
job for the customer?
$

ANSWERS
700
Labour cost = 10
Variable overhead cost =2
Lost contribution (80 – 34)/2 = 23
Relevant cost per hour 35
Total relevant cost = 20 hours × $35 = $700

Good day sir,i was solving this relevant costing question and i don’t understand why the variable overhead cost was added to the relevant cost of labour.Thank you
May 27, 2022 at 8:25 am #656616
John Moffat
Keymaster
- Topics: 57
- Replies: 50003
You have not typed out the whole question, but it would seem from the answer you have typed that the variable overheads are being charged on a labour hour basis and therefore if labour is being diverted then the variable overheads are treated in the same way as the labour cost.
May 27, 2022 at 10:45 pm #656668
Eunice03
- Topics: 43
- Replies: 38
A company uses its direct labour workforce to make a product for which the sales price and unit
cost are as follows:
$
Selling price 80
Direct materials 10
Direct labour (two hours) 20
Variable overheads (two hours) 4
Fixed overheads (two hours) 30

The workforce is operating at full capacity and it is not possible to obtain any additional labour
hours in the near future. A customer has asked the company to perform a special job that would
require 20 hours of direct labour time.
Required
What would be the relevant cost of diverting labour from its existing work to perform the special
job for the customer?

Sorry sir,I didn’t copy the question fully.This is the the question
May 28, 2022 at 7:50 am #656701
John Moffat
Keymaster
- Topics: 57
- Replies: 50003
That confirms what I wrote before, that because the variable overheads are being charged on a labour hour basis then they have been dealt with in the same way as the labour.
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