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I always mess up the Direct Labour and Direct material costs in the schedule tht we have to prepare on relevant cost basis.
Please help !
i refered to kaplan study kit – it has some tree – but i dont get it yet !
HELP !
- Topics: 0
- Replies: 63
- ☆☆
The decision tree is useful, you have to understand how to use it, ask some questions:
For material:
1. Have stock? If yes relevant cost = purchase price, if no move on.
2. Will it be replaced? If yes relevant cost = purchase price, if no then the relevant cost is the higher of net realisable value and contribution from alternative use.
For labour:
1. Have spare capacity? If yes relevant cost = 0, if no then move on.
2. Can hire people? If yes relevant cost = basic rate of hired labour, if no then the relevant cost is the lower of overtime payment and contribution from other work (this is because you bring people from other job to work in this job, therefore opportunity cost).- Topics: 0
- Replies: 63
- ☆☆
Spare capacity refers to free time, is the current labour has free time? If yes the relevant cost is zero because you are going to pay the labour anyway even if they didn’t work in this free time, now you got things for them to do, just use their free time and this won’t cost you any extra cost and therefore no relevant cost.
Remember relevant cost is FIC:
Future cost
Incremental cost
Cash flow
🙂
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