ACCA Applied Skills · Performance Management · Relevant cost analysis
Brook Co is deciding whether to accept a one-off order requiring 1,000 labour hours. Workers are paid $12 per hour and are currently idle for 400 of these hours, because there is no other work, but they must still be paid. The other 600 hours would be diverted from a product that earns a contribution of $20 per hour after labour cost is deducted (i.e. $20 per hour is calculated after paying the $12 wage). What is the relevant labour cost of the order?
Idle labour is a sunk, unavoidable cost with no relevant cost. Diverted hours cost the wage plus the contribution lost, which is $32 per hour. For 600 hours the relevant cost is $19,200.
- A$12,000
- B$7,200
- C$19,200Correct
- D$13,200
Explanation
Idle hours cost nothing extra as the wages are paid anyway. For the 600 diverted hours, the cost is the wage $12 plus the lost contribution $20 = $32 per hour, giving 600 x $32 = $19,200. Option $12,000 treats all hours as simply paid at the wage rate; $7,200 counts only the wage on 600 hours and omits the lost contribution.
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