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A new job requires 200 hours of Lab. the current pay rate is $16 per hour. The time for this job will be 2 weeks. Any overtime is paid at time and a half of the normal rate. In the next two weeks the spare capacity is 150 hours. The Labour is under contract and must be paid 40 hours per weeks labour even if there is any idle time. What will be the relevant cost?
The answer given is $1200 . i know it is pretty straightforward coz 200-150=50 * 24= $1200
but This is kind of confusing because of the 40 hour pw committed rate.
Pl Help 🙂
Regards
At present they have 150 hours spare capacity, and they are paying labour during this time whether or not they do the new job. (The 40 hours a week is not relevant because we do not know how many workers they have).
So the only extra cost of doing the new job is that they will have to pay for the extra 50 hours as overtime.
Yes,
but we do know that the job will take 2 weeks to finish and we commit 40 hours per week rate. So out of those 200 hours of work, we will pay them for 80 hours anyway. That leaves us with 120 hours. This point is actually confusing me.
If you read what I replied before, you will see that I said that the 40 hours a week is not relevant because we do not know how many workers there are!)
Sir, in test question 3 of relevant costing, shouldn’t the answer be nil (a) instead of 40,000 (b) ?
You are correct.
Sorry – the explanation is correct, but the answer should read ‘A’ and not “B’
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