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There’s an example in open tuition notes regarding relevant costing
The managing director of Parser Ltd, a small business, is considering undertaking a one-of contract
and has asked her inexperienced accountant to advise on what costs are likely to be incurred so
that she can price at a proft. The following schedule has been prepared:
Costs for special order:
Direct wages 28,500
Supervisor costs 11,500
General overheads 3 4,000
Machine depreciation 2,300
Machine overheads 18,000
Machine overheads (for running costs such as electricity) are charged at $3 per hour. It is
estimated that 6000 hours will be needed for the special order. The machine has 4000 hours available capacity. The further 2000 hours required will mean an existing job is taken of the machine resulting in a lost contribution of $2 per hour
Wouldn’t we solve it like this?
Total hours needed 6000 hours
Spare capacity 4000 hours
The relevant cost should be zero of 4000 hours as its at spare capacity
similarly the relevant cost of 2000 hours would be (lost contribution from existing job $2+normal rate of pay $3) so relevant cost would become 2000*5=$10000
But instead there’s a different approach adopted
Kindly help thanks