Relevant costing — OpenTuition Forums

TTahir8y ago

A company uses its direct labour workforce to make a product for which the sales price and unit cost are as follows. Direct materials $10 Direct labour(2 hours)$20 Variable overheads(2 hours)$4 Fixed overheads(2 hours)$30 Selling price$80 The workforce is operating at full capacity and its 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. What would be the relevant cost of diverting labour from its existing work to perform the special job for the customer? Well i saw the solution but cannot understand how examiner calculated the lost contribution? Any explanation will he helpful

John MoffatTutor8y ago#1

The lost contribution is the revenue less the variable costs (by definition!), and so is 80 - 10 - 20 - 4 = $46 per unit. Since it is hours that are limited, the lost contribution per hour is 46/2 = $23. Although that answers what you asked, I think might really be wanting to know the relevant cost per hour of using the labour. The relevant cost per hour (as I explain in my free lectures) is the lost contribution per hour plus the labour cost per hour plus the variable cost per hour (because variable costs here are on an hourly basis).

TTahir8y ago#2

@johnmoffat said: The lost contribution is the revenue less the variable costs (by definition!), and so is 80 - 10 - 20 - 4 = $46 per unit. Since it is hours that are limited, the lost contribution per hour is 46/2 = $23. Although that answers what you asked, I think might really be wanting to know the relevant cost per hour of using the labour. The relevant cost per hour (as I explain in my free lectures) is the lost contribution per hour plus the labour cost per hour plus the variable cost per hour (because variable costs here are on an hourly basis).

Thanks Sir! All Clear

John MoffatTutor8y ago#3

You are welcome :-)