10) Relevant costs and decision making

Question 1

Relevant cost of labour =

Answer 1

= Contribution forgone (per hour) PLUS direct labour cost (per hour) x hours on special contract

Question 2

What 2 assumptions are made when using limiting factor analysis in order to calculate maximum contribution

Answer 2

• Estimates of sales demand, prices and resources required for each product are known with certainty
• Variable costs per unit are not changed by increases or decreases in production volume

Question 3

How do you decide whether to make a component/product or buy it in from another company?

Answer 3

If the buying price is less than the variable manufacturing cost of the product/component then it should be bought in.

Question 4

Relevant costs when deciding if to further process joint products are…?

Answer 4

Incremental revenues and incremental costs. (Costs and revenues incurred and generated after the further processing begins)