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Relevant costingSolved

SASayeda Amal1mo ago

Hello,

I was going through the Relevant costing chapter in study hub and got a little bit confused regarding labour cost.

For materials, the Relevant cost would be the opportunity cost of contribution foregone if we used the materials that was regularly used in some other production and there was no replacement of it.

Similarly if labour was limited and we brought the workers to work for a new project and leave the existing project then the relevant cost I thought would be just the opportunity cost of the contribution foregone. But it's written that it's labour cost + contribution foregone.

If this is the case, then why don't we account the same for materials as well?

Thank you. :)

IAW3005IAW3005Tutor1mo ago#1

The key difference is whether the cost of the resource itself is still incurred when it is moved to the new project.

If you think of it this way, labour may involve both an actual extra cost and a cost of giving up another opportunity, whereas materials usually is the cost of replacing or using up the materials.

Relevant costing focuses on future costs and benefits that change depending on the decision.

  • Labour: Will we pay extra wages, and will we lose contribution from other work?

  • Materials: What do we give up by using these materials?

So if workers are transferred from existing production, their wages may still be paid. The new project uses labour that costs, say, $10 per hour, and the business also gives up the contribution from the work those hours would have produced. In this situation, relevant labour cost is wages for the new project + contribution foregone.

If you use the materials and must buy replacements, count the replacement cost. If you can’t replace them and must give up other production, count the contribution lost from that production.

Hope this helps

edited
SASayeda Amal1mo ago#2

Thank you so much for helping me out. My doubt has been cleared. :)

IAW3005IAW3005Tutor1mo ago#3

Glad to help