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Q) A contract requires 100 hours of skilled labour. Labour is paid $5 per hour. Labour is fully occupied making another product which is generrating a contribution 0f $8 per unit. Each unit of the other product requires 2 hours of skilled labour. What is the relevant cost of labopur?
Would appreciate your help in anvance.
Each unit of the other product lost is losing us $8 + (2 hours x $5) = $18.
Each unit takes 2 hours, so it is losing 18/2 = $9 per hour.The contract needs 100 hours, so the relevant cost is 100 x 9 = $900
Hi john,
I’m doing a question about relevant costing and the question say that you are the management accountant of a publishing and printing company which has been asked to quote for the production of a programme for the village fair the profound created by trainee accountant has variable cost of 1500 .. And in explanation it states that variable overheads represents the cost of operating the printing press and binding machine so is this cost relevant to the decision or not? Also in performa it’s have a heading printing press depreciation according to me it shouldn’t be relevant but in explanation it says when not being used by the company the printing press is hired to outside companies for £ 7 per hour and earns a contribution of 4 an hour and unlimited demand of this facility so is this a relevant cost?
Thanks
NourIt is impossible for me to answer with certainty without seeing the question (and why do you have the question but not the answer?).
However, the variable cost of 1500 would seem to be relevant – any extra cost that will be incurred is relevant.
Depreciation itself is certainly not relevant. However the income that could be earned from using the press elsewhere is an opportunity cost and certainly is relevant.
I do suggest that you watch the free lecture on relevant costing.
Hello Mr John ,
When you answered Debajyoti you added the cost of the hours
why we have to consider the cost of the hours which we have to pay anyhowwe should include only the lost contribution
because only we will shift the workers from the other job to the job we are concerned,is that ok,
Thanks for help…
No – that is wrong. I do suggest that you watch the free lecture on relevant costing.
If we move workers from other work, then the relevant cost is the labour cost per hour plus the lost contribution per hour.
In the free lecture I explain why in two ways. I can not type out the whole lecture here, but here is a tiny example which just might convince you.
Suppose workers are paid $5 per hour. They are currently working on a product that takes 1 hour to make, has a selling price of $10 per unit, and materials of $1 per unit. (So a contribution of 10 – 1 – 5 = $4
If we take the one hour for our contract, then we are still paying the labour. However, we lose the existing revenue of $10, but we save the materials of $1. So what we are losing by taking the labour away is a net $9. (Which is the same as the labour plus the lost contribution). It is a ‘trick’ the examiner often asks 🙂
I do suggest you watch all our free lectures – they are a complete course for F5 and cover everything you need to be able to pass the exam well.
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