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I have a question. In the lecture for Relevant Costing we are asked to re write the costs for a project in Exercise 2. It states the below regarding machine overheads
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 off the machine resulting in a lost contribution of $2 per hour.
The answer then goes on the state the relevant costs are $22,000 ($3 × 6000 hours) that will be incurred, plus the displacement costs of $2 × 2000 hours making a total of $22,000.)
My question is this, if the machine has 4000 hours available then why are we charging a full 6000 to relevant costs? Surely the 2000 hour difference which we would have to pull from another job would not be considered a relevant cost because if we didn’t go ahead with the project, we would still be using those hours. The only EXTRA we are paying for by taking on this project is the 4000 hours which would be otherwise unused?
Hi – If you can post this type of question in Ask the Tutor – I can help you more quickly. This is the general student forum for students to help each other 🙂
Ive had a look at the question – and you do seem to have the principles of relevant costing well understood – but I think the question is trying to say that the machine has 4000 available / free hours that can be used without affecting other jobs.
Unlike contracted labour when machines are idle they will not get paid – so even though the machine may have 4000 hours spare – there will be no cost UNLESS used for the project. In which case its $3 per hour.
Hope that explains
Kind Regards
Cath
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