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1) Firstly I just wanted to make clear, for relevant costing, in a case where there is no other use for an item of inventory, nor is there a scrape value, is the relevant cost of the item NIL?
2) Referring to the practice questions test
Qn no. 5 seems confusing.
Qn. no.3 is very similar to it however it is not indicated that there is any contribution lost and the answer for this question is that the relevant cost of labour would be Nil.In Qn. 5 there is lost contribution but the relevant cost is not just the lost contribution but also the labour cost. Why is this the case since labour would be paid for regardless of if the job is taken or not.
1. Correct
2. If labour is taken from another job, then the relevant cost is always: lost contribution + labour (and I do explain this with examples in my lectures on relevant costing).
Here is a tiny example of why:
Suppose the other work has SP of $20, labour of $5 and other variable costs (materials + var o/h’s) of $6. So a contribution of $9.
If the labour is taken away for the new contract, then the labour if $5 will still be paid. They they will lose the revenue of $20 but they will save the other variable costs of $6. So the net opportunity cost is 20 – 6 = $14. This is always equal to the contribution + the labour ($5 + $9).For more examples and explanation you need to watch the free lecture.
(This is a common question in the exam)
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